Buying a business? How do I know what the right business is for me?

Decide if owning a small business is right for you
If you are contemplating buying a business, where do you start and how do you know what is the right business for you? Running a business is not for everyone, so the first thing to be sure on is that you are 100% up for the job of running your own business. Be clear on the level of involvement you are prepared to have in the business. For many small businesses this means you will have to be 'jack of all and probably master of none', initially at least. Ownng a small business, especialy for the first time will be a steep learning curve. In a small business you will need to be all hands on the wheel until either you get on top of the day to day and/or the business is performing sustainably...you can take a deep breath now.

Which type of business suits me best?
Once you are committed to buying a business you need to work out which type of business fits you, your needs (be they personal, professional or financial), your experience, capability and skills and you need to decide what type of working environment you want to work in. At first it's normal to be attracted to businesses or industry sectors which might appear sexy, funky, exuding excitement and fun appeal. We don't want to be ney sayers at this point of the article, so it's okay to start with businesses which might immediately appeal to you. Don't be surprised if you hear yourself saying "I have always wanted to do that or run a business like that". Perhaps most importantly, you need to understand what things bring you joy in your current working environment and which things don't. As an example, if you don't like dealing face to face with customers then avoid buying a business which requires F2F contact such as a hospitality, direct sales or a direct service type business. Better to buy a web based business instead. If on the other hand you love food and personal interaction with customers and you don't mind longer hours, then hospitality is probably a good fit for you.

It is not so much about the nature of the business, all businesses are commonly engaged in selling to one level or another. Rather, it is about getting your experience, skills and capability aligned with what is required by the business and which will allow you to assimilate into the business quickly and succesfully. In some cases a business may have specific technical needs. If you are not a mechanic, it's unlikely you would consdier buying an auto mechanic business. On the other hand, although you don't have specific mechanical experience, you do have other skills and attributes which assuage the need to have specific mechanical experience. You have good people management, financial, sales and marketing skills and in this example the target business is supported by a robust team of mechanics who provide the technical expertise. It all depends on how you align the things you bring to a business, the needs and expectations you have and in the end, and after all other considerations, where you will be happy working and most effective as an owner operator.

Having a check list of the things you like doing and are good at, and the things you don't like doing and are not so good at is a good place to start narrowing down the list of business types you are likely to work well in. When you find a business you like simply list the essential things you think will be required for running that business succesfully and compare these to your list of likes and dislikes. This will probably give you a good idea whether or not the business is right for you. A key consideration for buying a business is that you have to be happy running it, through the good times and the bad. Passion, commitment and motivation to succeed are important elements of running a sucessful small business and as an owner operator, you have to be highly self motivated.

What are my expectations for the business?
Now you know the type/s of business that are right for you, the next step is to understand what you want from the business? It is likely these needs will fall into three buckets. 1). Personal: running the business needs to be a personally satisfying and enjoyable experience. It may also fulfill other personal need considerations such as family, work life balance, geographical, stage in life, unrealised ambition to work for one's self etc. 2). Financial: the business will need to meet your financial needs. These could be set needs e.g. you want to achieve a sustainable income, you wish to grow your current income through a business venture, you wish to develop a business and achieve a healthy capital return on your investment, and this will provide you a retirement fund. Whatever your financial requirements, it's important when looking at potential businesses that you align the business's profitability (and cashflow) to your financial expectations. Will the business provide you the necessary income over the period of time you require? 3). Professional: you will likely wish to achieve or continue to deliver on professional needs which might include aspiratons for management, reward for performance, continuing to be in a similar industry or business (but as the owner of your own business), being a key decision maker or even managing people.

You may have acquired specific skills and capabilities over your career and owning your own business will allow you to continue to exercise and develop these skills. For many, owning and running your own business is a chance to do something for yourself and to no longer have to answer or report to someone else. To be self-reliant and in charge of one's own destiny! The truth here is that even as an onwer operator you are still reporting to someone. If it's not your banker, then it's definately your customers and ultimately you still have to answer to yourself!

Now that you have done the soul searching, aligned your needs and likes, you have basically formed a needs profile.

The type and nature of the business, industry sector, market, location, operating environment, financial profile, skills and experience requirement, and overall suitability to you!

How much money you have can also determine the type of business
Now it's time to align your investment capacity with the type of business you want. Depending on how much equity you have and in what form this is available, will ultimatey determine which business is right for you. You have selected the type of business you would like to own and run and now it's time to find one you can afford. Depending on your risk appetite you will likely need to find business targets which are within your capital budget. Your capital for purchase could be made up of personal cash from savings or investments, a redundancy payout or proceeds from an inheretence. You may fund the purchase in part through some sort of finance loan. In many cases, new business owners mortgage their major assests such as the family home or property as well. Aligning the right business with how much you can reasonably afford is a very important step in the selection process. Unfortunately having decided the right type of business for you, it may be beyond your reach beacuse you do not have the funds. The fact is that some businesses are more expensive by nature of the industry and of course how financially successful they are. So many times, we see a new business buyer stretch themselves to buy the most expensive, largest or what appears to be the 'best' business on their target list. They are so keen to acquire the business that they over-stretch themselves funding the purchase and forget about the capital needs of actually running the business.

In many cases when buying a new business, despite the business being historically cash-flow positive, the new owner is literally starting out as a new business day one. You have no debtors, but you immediately have creditors (loan, staff, stock, running expenses etc) and depending on your accounts receivable cycle you may need to inject cash into the business until the normal cash-flow of the business returns. In some cases this means you may not have enough money coming in to cover the money going out for up to 2 months or more. Aligning both the capital for purchase and the working capital required to run your new business is therefore an important consideration when choosing the right business. The lesson here is "don't bite off more than you can chew". Do the math, and this is where a thorough review and due diligence of the target business is required. Know what you can afford both for buying and initially running the business. This is particularly important if the business has seasonal or lumpy cash-flow.

Do your due diligence and plan for the future
Have you considered how scaleable the business is as part of your review? It may be that the intended business performs consistently and at a sustainable level (profit) for your needs. You are happy with this model. But, if your needs require stronger returns from the business than it is currrently providing, have you worked out how greater returns can be achieved? Do you have a plan to grow and develop the business? Is it sensible and achievable? We see many new business owners either omit to do a forward revenue, profit and cash forecast, or purchase a business with little or no plans for running and developing the business post sale.

Having a forward plan to guide you and establish clear objectives (whether financial or other) is an important part of making sure you are buying the right business. A business plan will certainly assist you form an opinion on the future performance and returns of the business, and checking these fit with your needs and aspirations will be one of the key markers for a 'right fit'. Understanding the return on the capital you invest and the time to recoup your investment should be understood and this will ultimately form part of your decision whether or not to buy the business. Additionally, a business plan outlining how you will run the business and the future forecast performance of the business, particularly if this shows growth, will stand you in good stead when applying for a loan to fund the purchase. Most banks now require to see a business plan and forecasts as part of their loan approval process.

Assuming now that you have done a practical review of your needs and aligned these with the type of business, found examples of potential businesses, reviewed and compared these against both your checklist and other business competitors, drawn a conclusion on range of value for these types of business, understood your capital capacity to fund the purchase and working needs and prepared a business plan for your target as part of a thorough due diligence and review; you are set to enter negotiations to buy your ideal business. Now the fun of negotiation begins.

Recapping

Undertake a personal review of your strengths, capabilities, likes, weaknesses and dislikes and how you would like to apply these in a personal business setting.
Align these with the types of businesses you would like to own and what you regard as key management inputs for running these target businesses successfully.
Now develop a shorter list of business types which match your needs and capability profile. Reduce the list until you have a few (2-3) business type matches. Further background research into the types of businesses you have identified is also very helpful for deciding a business type.
Go hunting for your business target/s.
Once a target/s is identified, ensure you understand as much about the business being offered for sale via review and due diligence.
Keep checking that the business you have targeted will fulfill on your needs and match your profile needs.
Do your due diligence on the target. Is it operating and performing as the seller represents?
Understand the capital requirements and align these with your financial capacity. Be disciplined, don't over-gear yourself. Bad surprises happen even in the best businesses. Be sure you can fund the future activities of the business and in line with your plans.
Prepare a business plan to assist you understand the potential upside of the business and the potential returns. It's good to take a middling or conservative view of future growth and earnings.
If everything aligns, go buy your ideal business!

When you are ready to take the step and buy your own business, it's good to have some one in your corner helping you stay on track and achieve the optimal match and outcome. BizVet can help with our end to end services providing you advice on:

Business match (matching and finding a suitable business to your needs profile)
Reviewing and assessing the target.
We can help you develop effective plans for your business and we can help you negotiate a sale.

Contact BizVet by visiting us at www.bizvet.com.au or visit us on facebook for a complimentary introduction to our services. We are sure we can help.

Written by Daryl Bird.
Daryl is a principal advisor for Bizvet advisory and consulting services for small business.