Howdy Girdleyworld!
According to my reader survey (please fill it out if you haven’t!) a ton of you are interested in buying businesses.
So today I’ll go over the most important first step in acquisitions — that is, figuring out what you actually want with a business-buying checklist.
Let’s do it!
Why make a checklist?
Business buying is a numbers game.
Because ultimately, you find the right business for you by looking at a ton of businesses.
But if you start agonizing over each one, you’ll never get anywhere. Could I make this work? Would I enjoy this? Can we stretch our budget?
I know from experience: it’s super easy to get emotional about a deal when you finally find something you like. Your brain is really good at convincing yourself something is a good deal.
But the worst outcome here is buying a bad business.
So keep in mind: it’s better to do no deal than a bad deal.
And a good checklist will help you catch bad deals before you’re in too deep.
The Checklist
So I like to break my checklist down into two parts.
One is what I call mandate, which is numbers and whatever can be very easily quantified.
The other part is the more qualitative stuff, which I call thesis.
Part 1: Mandate
Start by setting some nuts-and-bolts parameters.
- Is there an industry you have an unfair advantage in?
- Is there a location you want to be?
- How about gross margin? Personally, I think low gross margin businesses seem really hard. So I put “high margin only” on my checklist. You might feel differently.
- Company age. Conventional bank lending typically won’t fund brand new businesses until they’ve proved a history of cash flow.
- Capital requirements. How much do you have? How much can you raise? You shouldn’t be looking at businesses you can’t afford to run for a while.
- Are there licensure rules? If you’ve got your industry figured out, make sure you are very familiar with the rules.
- Ticket size / average customer value. Would you rather have a few big customers, but carry a greater risk if you lose one, or have a bunch of lower-paying clients?
- Lastly, there’s the cocktail party rule. I don’t want to do any business I’d be embarrassed to talk about at a cocktail party. So even if it fit all my criteria, I’m not going to buy a strip club or a weed dispensary. I want to be proud of the businesses I own. And I want to make the world a better place.
Use this item as a gut check: does the business work with what you want to be doing with your life?
A lot of this quantifiable stuff you can find on LinkedIn. You can also dig around for databases online.
Next, let’s look at some less quantitative stuff.
Thesis
This is the less quantitative stuff (mostly). Think about:
- State of the company. Do you want to buy a distressed business, a stable one, or a thriving one? Running a turnaround is really hard… but you can probably get it at a great price.
- Revenue per employee. This gives you a sense of how well the business is run. As you run your process, you’ll get a sense for what’s normal in your industry.
- Bidding environment for the company. Are you ready to be competitive? Will you be able to outfinance and outcompete private equity?
- Tailwinds versus headwinds. When trends are making your life easier, that’s a tailwind (e.g. baby boomers are retiring, so selling vacation packages is easy). There may be less competition in a headwind, but there’s no bonus points for doing things on hard mode.
- Seller context. Why is the seller getting out? I’m always asking, “Why am I the lucky buyer?” If I don’t have a good answer, my spidey sense starts tingling. I don’t want surprises.
- Growth opportunity. Do you want to a nice stable business, or do you want to expand? One guy on Twitter grew a $100,000 fencing company to $10M. But it’s hard freakin’ work!
- Exitability. Your business should be compatible with the life you want to live today. But consider: are you planning to keep this business for the long haul, or do you want something easy to resell? PE loves plumbing or lawn care businesses.
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And there you have my list!
Two quick notes:
- For each requirement, ask: is this a must-have or a nice to have?
- There’s no such thing as a perfect deal. Every deal with have something wrong with it. It’s just about finding the problems you’re prepared to solve.
Good luck!
This newsletter is adapted from a mini-course I made last year for beginner business buyers. It’s called How to Find a Great Business to Buy.
Are you interested in more business-buying content? Let me know!
Have a great week,
Michael
