90% of Prospective Buyers Never Buy a Business
So you want to buy a business? So do many others. However, here is an often-cited statistic that may surprise you: 90% of buyers who begin the process of looking for a business never make an acquisition. There are numerous reasons for this sad statistic, but chief among them is buyers (and sellers as well) begin the process with insufficient knowledge of the business-for-sale marketplace and have unrealistic expectations.
Unrealistic Seller and Buyer Expectations is a Huge Problem
In fact, only 20% of small businesses ever sell – primarily for two reasons: 1) sellers’ lack of forward planning to prepare their businesses for sale, and 2) sellers have unrealistic expectations. As a result of the latter reason, as you explore business-for-sale website listings, you will discover that many (if not most) businesses are overpriced. Here is another sad fact: far too many business brokers are willing to accept overpriced listings under the theory that the marketplace will ultimately adjust the seller’s expectations. Although true, that philosophy leads mostly to failed attempts to sell a business as sellers often have difficulty adjusting their expectations based on a buyers analysis. It is the business broker’s responsibility to educate, manage and set reasonable expectations for a business owner, but many fail to do so and, as a result, ultimately also fail in their business brokerage career.
Business brokers should also help set realistic expectations for buyers – especially for those who are first-time buyers. This article, along with others on our website, is intended to help educate buyers so they enter the acquisition process with reasonable expectations. Self-education is the key to success in successfully acquiring a business. To begin, you must ask yourself two questions:
- How much do I have available (and am willing) to invest as a down payment on a business acquisition?
- What is the minimum I need to earn from a business to be able to maintain my current lifestyle and meet my personal obligations?
At this point, we strongly encourage you to read this article on our website If I Buy a Business, What Down Payment is Required and How Much Can I Pay Myself?. It will provide a brief education regarding how businesses are priced based on seller’s discretionary earnings (SDE), which is often informally referred to as cash flow. The article will also explain the amount of down payments typically required for business acquisitions.
Having read the above-reference article, welcome back. With the knowledge gained from that article, be sure to answer the two questions above re: the down payment you are willing to invest and the minimum amount of income you require from a business acquisition.
Assess Your Strengths and Develop Preliminary Acquisition Criteria
At this point perform an honest self-assessment of your background, industry experience, skills, strengths and weaknesses. It’s always best to make an acquisition in an industry with which you have some familiarity or for which your skills and strengths enable you to make an easy transition. Note the words “honest self-assessment”. There is nothing to be gained by fooling yourself in this exercise and there’s a lot to lose. Acquiring a business can be a risky proposition for those who are not adequately prepared for the demands and responsibilities of business ownership.
With the knowledge gained from your self-assessment, attempt to make a preliminary list of criteria that are important to you in considering an acquisition. This is a difficult proposition if you are starting from scratch, but can be helpful in filtering through business listings. As you begin looking at internet listings and actually visiting businesses, it will become much easier to refine your criteria.
Business-For-Sale Internet Websites
Having accomplished all the above, if you still think you want to acquire a business, it’s time to start reviewing available businesses on the business-for-sale listing websites. We would suggest reviewing websites in the following order:
BizBuySell is the most popular and active business listing website. Having just looked, BizBuySell’s home page indicates it has “over 45,000 active businesses for sale”. That’s obviously overwhelming! But don’t stop … you’ve only just begun. You can filter the results by geographic location, by industry, by asking price, by gross income and by cash flow. We suggest you ignore the asking price (because too many are overpriced) and ignore the gross income (which are revenues/sales) because you should be interested in the business’ profitability (cash flow).
When we filtered using Missouri as the geographic criteria, the number of listings returned was 498. That’s still too many to review. When we filtered using the five Missouri counties comprising the St. Louis metro area, the total listing returned was 246. Again, that’s still too many to examine.
You can filter by industry type. If we were looking, we would eliminate convenience stores, gas stations, bars/taverns, restaurants and other eating and drinking places. Of the 498 Missouri listings, about 30% (151) were classified into those categories. By eliminating the above types of business from the five St. Louis metro area counties, the search results decreased from 246 to 182. Again, that’s still too many to examine.
You can also search by cash flow. When a cash flow filter of $100,000 – $500,000 was applied to the 182 results referred to above, the system returned 43 results. To summarize, there were 43 businesses listed in the five counties comprising the St. Louis metro area with cash flows between $100,000 – $500,000 that were not categorized as convenience stores, gas stations, bars/taverns, restaurants and other eating and drinking places.
How to Filter through Business-for-Sale Listings
This is how we recommend you begin your search process – first by geographic area, then eliminate industries that you know will not be of interest, then filter according to the cash flow results that meets your minimum requirements and your maximum down payment. Again, read this article for more information about those two topics: If I Buy a Business, What Down Payment is Required and How Much Can I Pay Myself?.
The six other business-for-sale websites listed above also have similar filtering options. Although you will likely find a lot of the same listings on those websites that you find on bizbuysell, you may also find some unique listings. There is no way to know without going through the steps to identify the businesses that might be of interest to you. It’s possible that you might uncover a gem of a business that other buyers are not seeing because they are not delving into the other business-for-sale websites. You should be aware that the most attractive businesses will command a lot of competition and can sell very quickly. That’s why there may be a benefit to exploring some of the lesser-traveled websites.
Also, most websites offer an email alert system for new listings. On BizBuySell the system is known as Biz Alert. After you have performed a time-consuming and comprehensive search and review of the business-for-sale websites, theoretically, you shouldn’t have to repeat that process if you sign up for email alerts of their new listings.
This series of articles will continue with Buyers: Why It’s Important to Inquire About Many Businesses.