A few years back, we conducted a survey with just under one thousand people who were looking to buy a business, and one of the questions asked them to identify their single biggest concern. While the answers included how to finance the deal, worries about sellers not disclosing true numbers, or hidden problems that could surface later, the overwhelming concern – 74 percent, was making sure they bought the right business.
Given the vast numbers of businesses listed for sale and the ease that the Internet has enabled businesses to be listed, I am certain if we were to conduct the survey again, the results would be similar. So given the wealth of choices, how can a prospective business buyer narrow down the choices?
Being Open-Minded Is Not An Effective Strategy
Many potential buyers believe that being open-minded about what type of business to buy is a valid approach to the process. While this may seem to be a good idea, it is in fact quite detrimental. A buyer’s goal must be to narrow down potential business types as quickly as possible. If not, they will simply become another “looker” who spends an inordinate amount of time searching online business for sale listings and seldom will they achieve any meaningful progress.
Buyers have to look at the search process as a hopper whereby you start off with a wide swath of businesses to consider, but with a clearly defined objective of getting the list pared down quickly to a very limited number of business types to consider purchasing.
Narrowing Down The List
If you are in the majority of prospective buyers who does not know what exact type of business you wish to buy, here is a guideline which is an excellent strategy to pursue:
Identify some broad categories of prospective businesses types that are of interest (you may want to first eliminate what you don’t want).
- Contact and visit with 2 to 3 sellers in each of the categories you initially identify.
- From these meetings and preliminary reviews, compile a list of the key ingredients you want in a business. For example, you may decide you want a business that deals only with other businesses, limited employees, recurring revenues, distinct competitive advantages, etc. The idea is to build a list of five steadfast rules in order to ensure any potential business meets your criteria.
- From this initial list, reduce it to one or two business types then focus your search on those only while subjecting each to the criteria you have established and again narrowing down the list.
It is very important, and especially if you are working with any business brokers, to be upfront with them about your approach so they won’t dismiss your strategy as a lack of seriousness and better brokers can be helpful if they know that you are (a) qualified and (b) serious.
Ultimately, you want to exit this exercise knowing the exact type of business you want. Hopefully, you will locate one with this initiative but if not, you can then search more within the category or consider other options like contacting businesses directly which may not be on the market by utilizing search firms or doing it yourself.
The Importance Of Getting To The Right Business Type
Most prospective business buyers are first-timers and generally have no clue what is involved with buying a business nor do many of them want to even spend money or time to educate themselves. Furthermore, their barometer for the business buying process usually (and incorrectly) draws upon the only similar prior experiences they have which is with buying a house.
What buyers fail to recognize is unlike the real estate market (in normal times), where the majority of people will eventually purchase a property, over ninety percent of those who look to buy a business fail to ever complete a transaction. As such, brokers and sellers must be extremely diligent to eliminate the unqualified lookers and so they cannot spend time with prospects who they do not believe will purchase a business.
A buyer who lacks knowledge of the process, who does not know what type of business is right for them or even how to go about making that determination, coupled with not be willing to educate themself about how to even buy a business, cannot possibly expect business brokers and sellers to pay much attention to them
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With so many variables to the process, at the very least, a buyer has to work towards knowing what type of business they want to buy to avoid becoming another “90 Percenter”. By doing so, a buyer will be perceived as infinitely more qualified by brokers and sellers when they do approach them to learn more about a particular business.
Have a great week.
Richard Parker
Diomo.com