Finding businesses for sale is relatively easy. Finding the right business to buy is much harder.
A good acquisition needs to work financially, but it also needs to suit your experience, resources and plans for the business after you take ownership.
Before getting drawn into individual opportunities, it helps to be clear about what you’re actually looking for.
Start with your acquisition criteria
Your acquisition criteria are simply the characteristics you want in a business.
These might include:
- sector
- location
- revenue
- EBITDA or profitability
- purchase price
- recurring revenue
- number of employees
- level of owner involvement
- growth potential
Try not to make the criteria so restrictive that almost nothing qualifies.
The aim is to create enough structure to quickly decide whether an opportunity deserves your attention.
Look for a business you understand
You don’t necessarily need previous experience in exactly the same industry, but you should understand why the business works.
Ask yourself:
- How does it make money?
- Why do customers choose it?
- What keeps those customers coming back?
- What could cause the business to lose revenue?
- What would I need to know to run it successfully?
If you can’t clearly explain how the business makes money and why it should continue doing so, you probably don’t understand the opportunity well enough yet.
Decide how involved you want to be
Some buyers want to acquire a business and become its managing director.
Others want an established management team already in place.
That distinction can completely change what constitutes the right acquisition.
A profitable owner-managed company may look attractive financially, but if the owner handles sales, operations, recruitment and key customer relationships, replacing them could effectively mean buying yourself a full-time job.
There is nothing wrong with that if it’s what you want.
The important thing is understanding what role you will actually need to play after completion.
Look beyond the asking price
It is easy to start searching based on what you can afford.
But two businesses with the same asking price can be completely different opportunities.
Look at the underlying financial performance, margins, cash generation, customer base and investment requirements.
A cheaper business that requires significant additional investment may ultimately need more capital than a higher-quality business with a larger headline price.
Equally, don’t dismiss an opportunity simply because the asking price initially looks too high. There may be flexibility around valuation or transaction structure.
Look at the quality of the revenue
£5 million of revenue doesn’t tell you very much on its own.
You need to understand where it comes from.
A business with contracted or highly recurring revenue may provide greater visibility over future performance than one that needs to win entirely new customers every month.
Look at customer concentration too.
If one customer represents 40% of sales, losing that relationship could fundamentally change the economics of the acquisition.
Understanding the quality of revenue is often more useful than simply looking at its size.
Ask why the owner is selling
There are plenty of perfectly reasonable reasons to sell a good business.
The owner may be retiring, looking to realise some of their wealth, moving onto another venture or simply feel they have taken the company as far as they want to.
But you should still understand the reason.
More importantly, ask yourself whether anything is changing that could make the business less attractive in the future.
You are buying the company’s future performance, not its historic accounts.
Look for opportunities you can actually improve
A good acquisition doesn’t necessarily need to be a perfect business.
Sometimes the most interesting opportunities are good businesses with identifiable areas for improvement.
Perhaps the company has done very little marketing. Maybe there is an opportunity to expand geographically, improve pricing, introduce additional services or make better use of technology.
The key is distinguishing between opportunity and wishful thinking.
If your investment case depends on doubling revenue within two years, you should have a convincing explanation for how that will happen.
Where can you find businesses to buy?
Businesses are sold through a number of channels, including business marketplaces, brokers, corporate finance advisers and direct approaches to owners.
Your own professional network can also be valuable.
Not every business that could be acquired is publicly advertised. Some owners prefer to sell confidentially, while others may consider an approach from the right buyer even if they haven’t formally decided to sell.
It can therefore be worth looking beyond businesses that are openly marketed.
Don’t fall in love with the first opportunity
Buying a business can become emotional surprisingly quickly.
Once you’ve spent time meeting an owner, analysing the numbers and imagining what you could do with the company, it becomes easy to start finding reasons why the deal should work.
Stay disciplined.
Go back to the criteria you set at the beginning and ask whether the business still meets them.
If something significant changes during the process, reassess the opportunity rather than simply adjusting your expectations to keep the transaction alive.
Walking away from the wrong deal can be just as important as completing the right one.
Finding the right opportunity
The right business will be different for every buyer.
What matters is finding something you understand, can realistically finance and are well placed to own or operate.
Be clear about what you’re looking for but remain open to opportunities that don’t fit every criterion perfectly.
The goal isn’t to find a flawless business.
It’s to find a good business at a sensible valuation where you understand both the risks and the opportunity ahead.
Find your next acquisition on The Brokerage
The Brokerage brings together businesses for sale and buyers actively looking for acquisition opportunities.
Create your buyer profile, set your acquisition criteria and start discovering businesses that match what you’re looking for.