How to Buy a Business Part 2: Finding and Evaluating the Right Deals

Buying a business can be a great way to build wealth and create a lifestyle with more flexibility and autonomy, but the process can be complex and requires a thorough understanding of how to find the right business and evaluate its potential. In this blog post, I'll walk you through the essentials of identifying suitable acquisition targets and assessing if they're a good fit for you as an owner. If you haven’t already checked out Who Can Buy a Business, I highly recommend starting there. Let’s dive in!

1. Finding Businesses: Where to Start

When it comes to finding a business to buy, there are several avenues to explore. Online marketplaces like BizBuySell and BizQuest are popular options. They are similar to Zillow for real estate but specifically for businesses. These platforms list various businesses for sale, including details about the asset, purchase price, financials, and contact information. Sometimes the business owner lists the sale directly, but often it’s a business broker handling the process.

I’ve been asked if these sites are actually useful, or if you’re only getting the bottom of the barrel listings. It is true that brokers will sometimes send out a listing to their existing network of qualified buyers before posting online. But, for what it’s worth, I both bought and sold my laundromat through one of these sites. There are legitimate listings, but no doubt you will have to wade through a number of duds to find your perfect match.

Another approach is direct outreach—reaching out to business owners who might be interested in selling. This could be as simple as sending a handwritten letter or a personalized email, expressing interest in their business. Additionally, establishing relationships with business brokers in your target area can provide access to opportunities that might not yet be listed publicly. Building a rapport with a broker and demonstrating that you’re a serious buyer can make all the difference in getting a head start on potential deals.

2. Evaluating Fit: Is This Business Right for You?

Once you’ve identified a potential business, the next step is determining if it’s a good fit for you. This involves thinking through your ability and willingness to operate the business. While the financials might look great, it’s essential to ensure that the business aligns with your skills and interests.

A critical question to ask yourself is: Can you, and do you want to, operate this business? Many first-time buyers make the mistake of assuming they can take a passive approach, envisioning themselves as overseers rather than hands-on operators. While larger businesses with multiple layers of management might allow for a more hands-off role, smaller businesses often require the owner to be directly involved in day-to-day operations.

If you’re considering a business outside your area of expertise, ask yourself if you’re prepared to learn the ropes. For example, if you buy a service based business and lack the skills to perform the core service, you might face challenges if staff members leave unexpectedly. Understanding the operations inside and out, especially for your first acquisition, will set you up for long term success.

My favorite due diligence question to a seller is: What are 3 problems you’ve dealt with in the last month? The answer is incredibly telling. If a seller is hesitant to answer or says there are no problems, that’s a huge red flag. The truth is, all businesses have problems. That’s the nature of the game. It’s about finding a business that has the kinds of problems you’re able to and willing to deal with. As an operator, you will be Chief Problem Solver. Understand what the current owner is doing on a day-to-day basis and assess whether that’s a role you want to take on.

A note about “absentee” businesses: You will see businesses advertised that are “absentee run”. A couple things to note about this: 1) It might not be true. Sellers know that this makes their business sound more appealing, and some may not be totally transparent about the amount of work that goes into it. 2) Even if it’s true for the seller, it may not be possible for you, at least not right away. The seller may have owned the business for 10 years before moving out of state and running it absentee. They may have a trusted employee they know personally, one who may not stick around for a new owner.

If you are looking at a business that claims to be “absentee run”, make sure you understand how the seller is defining this term. Understand that as a new owner you will want to set aside extra time in the beginning to learn the ins and outs of the business. I was at my laundromat for at least 8 hours a day for 14 days straight when we first bought it. I consider that time essential in learning operations and later having the ability to step back later.

3. Financial Assessment: The Numbers Matter

It’s no secret that the financial health of a business is a major factor in determining whether it’s a viable investment. As you review potential deals, focus on whether the business’s cash flow can support debt payments, cover your living expenses, and still leave room for profitability.

Look beyond surface-level numbers like revenue and focus on key metrics such as Seller’s Discretionary Earnings (SDE) and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). These metrics give a clearer picture of the business’s true earning potential, factoring in adjustments for one-time expenses and non-operational costs. Understanding these numbers will help you determine a fair valuation and ensure you’re not overpaying for a business.

If you’re planning to finance the acquisition using an SBA loan, it’s important that the business has a history of cash flow. Lenders typically want to see at least a 1.2 debt service coverage ratio (DSCR) for the interim financials, as well as the last 3 years. If the business has seen huge improvements or growth in the last year and the seller is basing the valuation on that, it can be tough to get done with SBA.

Check out my SBA loan calculator (and the video where I break it down) for help assessing your deal.

4. Building Relationships with Sellers: A Key to Success

When buying a business, a good relationship with the seller can make a big difference. As you go through the process, pay close attention to how the seller interacts with you. Are they transparent about the business’s operations and history? Do they seem organized, and are they responsive to your inquiries?

A seller who is willing to provide support during the transition period can be invaluable, especially as you learn the ins and outs of the business. In my own experience, having a positive rapport with the seller of my laundromat was a game changer, as they continued to provide support even after the sale. If you get a sense that a seller is being evasive or uncooperative, it might be a red flag that you should reconsider the purchase.

Final Thoughts: Taking the Next Step

Buying a business is a big step, but with the right preparation and understanding, it can be a rewarding path to financial independence. By focusing on where to find businesses, evaluating operational fit, assessing financial health, and building strong relationships with sellers, you’ll be well on your way to finding a business that aligns with your goals.

If you found this guide helpful, consider subscribing to my YouTube channel, where I dive deeper into each of these topics. And if you’d like to discuss financing options for your acquisition, feel free to reach out—I’d love to help you make your small business ownership dreams a reality!