Becoming a business owner in today’s world involves many considerations as you seek to establish your profitable business ideas. One of the major ones would be to buy an existing business or start a new one. There are different types of companies anyone can venture into, and it’s the same when you’re looking out for businesses to purchase. Not all industries are in high demand, so you should check out some factors when you’re choosing an existing business to buy.
While there are many advantages to buying an existing business, you must ensure that it is profitable. While many companies might be highly profitable, some might take time to begin to generate profits.
Businesses aren’t all about profits, and this means that there are more factors to consider that would determine the success of your newly acquired business. Here are other factors to consider in choosing an existing business to buy:
Generally speaking, it makes more sense to pursue industries with a lot of players. In straightforward terms, the more companies operating in a particular sector, the more opportunities exist in the space.
If you are interested in generating profits early, then you should focus on an industry with at least 25,000 companies or small businesses. This would include such sectors as home services and certain professional services. These businesses seem small, but they play a significant role in the economy and are highly profitable.
Any good business that taps into highly demanded human needs does very well during recessions, be it the home services industry or a family-owned business that has served a community for generations. A business that takes on leverage (like using debt to finance a business acquisition) is especially susceptible during the economic downturn and thus fails much faster. That’s why it is critical to focus our attention on buying a business that can survive or even gain market share during a recession.
There are a few things that recession-resistant business categories have in common:
Focus your efforts on buying a business that has a high fixed asset base, preferably equipment or vehicles. There are three primary reasons for this:
Depreciation: When one buys a firm having significant assets, he is legally entitled to step up the value of those assets on his balance sheet. This gives you considerable tax relief if you are currently enjoying a high income.
Finance: Lenders considerably prefer to lend to those businesses that have a substantial asset base. The reasoning behind this mindset is that should your business start to become distressed, then it’s the assets that can be sold and the debts repaid from this end. This would mean you may find more (and easier) ways to finance the purchase of a business that has a significant asset base.
The barrier to Entry: If a business requires a significant investment in assets to function, it can reduce the number of potential competitors in the market, especially over the short and medium term. This is because it becomes much more expensive for each competitor to actually serve customers, which acts as a constraint on the number of new entrants.
The profit margin of a business denotes the returns on invested capital that a business brings in. For instance, Shopify estimated that the average profitability of general retail brands sits around 20-25%. That’s the percentage of total revenue the owner gets to keep. Still, a net profit margin of 30% is a great result.
That is different for many other industries. In your business model, you should separate the underperformers from the outperformers. This would help you know which industry to focus on.
Another yet important factor to consider is the level of customer retention and call-back services. Are the services once in a lifetime, or do they require extra services once in a while? How much can be earned from one customer?
It is necessary to understand exactly what each customer will be worth to your bottom line over the lifetime of your business relationship with them. For instance, residential HVAC systems have to be replaced every 12 years, and each unit is valued at $12,000 to replace. In that period of time, you will likely provide some level of service, either in the form of repairs or in routine maintenance. This often works out to a per-year value of over $1,000 per customer.
Compare that with residential plumbing. Over the same 12-year period, you might have six service calls at an average cost of $350 for an approximate total annual value per customer of $175 per customer.
Commercial plumbing pays better, though. If you’re jetting restaurant drains on a regular basis, you can get close to $300 a quarter. And you’ll likely get the call for any other plumbing work they need. Given how complex restaurant plumbing systems are used, that can easily mean an additional one or two calls per year. All of a sudden, the yearly value is nearly $2,000 per customer. Now, considering this, it helps you anticipate the cash flow and turnover possible in your business.
In buying an existing business, the demography of target customers is a vital thing to consider, and, of course, it is essential to find out if there are seasons when the business becomes more profitable.
The Baby Boomers of most countries are a vast age group, plus they have money to spend. That means if you have a business that directly serves their needs, then it can be quite the catch. A large percentage of this cohort are also home and property owners; they love to invest in real estate. Some others love aesthetics in their homes and are often in need of work done on their homes.
Some industries even depend on particular seasons and weather conditions for customer flow. For instance, this is increasingly the case with worsening climate change. Many roofing firms have begun to depend on hailstorms in certain regions, and plumbers may be waiting for a bump in calls to pump septic tanks after heavy rainfall.
Many industries are more profitable than others on the market. As the market is filled with new and popular ideas and trends, people might get lured to start their own businesses. While many people might consider starting their businesses, many consider a company that is in a profitable genre. If you’re thinking of buying a business but you’re not sure where to begin, take a look at a few of the most significant and prosperous industries where you should consider buying a business:
1. Technology: Advancements in technology allow entrepreneurs to buy their own tech companies. Robotics, cyber security, augmented and virtual reality (AR) (VR), artificial intelligence (AI), and 3-D printing are some of the most thriving technologies in the market right now.
The fintech industry incorporates technology in various ways to develop better means through which users can access financial services. While it is still not at the peak of its development, it is continuously growing because of the advances in technology and, lately, because of the implementation of AI in this field. For instance, it is estimated that in the year 2024, the revenue for this industry will reach about $51.89 billion. Even with this projection, it is possible that by the year 2028, this number has managed to be close to $70.60 billion.
Over the last years, with the growth of cyber threats, cybersecurity has also gained momentum. Threats in cyberspace involve not only governments or enterprises but also individual citizens. Last year, one in three people in the United States fell prey to online financial fraud. The estimated value of the cybersecurity market in 2024 is close to a total of approximately US$200 billion, which might even reach up to US$315 billion by 2029, therefore being an excellent business investment. What better lucrative business would you want to invest in?
2. Accounting: It is one of the most common services that every individual and corporation across the world requires. This way, accounting services are in high demand. The services include business outsourcing, personal financial planning, bookkeeping, and tax preparation. Accounting services have been a consistently growing industry for years.
3. Legal firms: Like accounting services, every individual and corporation alike needs a lawyer at some point in their lives. Law firms provide a diverse set of services, including Criminal law, Business law, Family law, Trusts and estates, Constitutional law, Intellectual property law, Personal injury law, and Employment law. Nowadays, these services have become necessities for individuals and businesses.
4. Real Estate: The real estate market has increased in recent years, offering both affordable and luxury options to clients. As the millennial generation is not buying properties like the preceding generations, the rental market has grown exponentially.
5. Training and fitness: Over the last few years, the demands for training and fitness instructors have grown immensely. Athletic centers are becoming popular every day, maintaining the need for educated trainers and instructors.
For those who would looking to buy a small business or expand an existing one by acquiring one of their competitors, the question is: how does one value a business prior to making the actual acquisition?
A business valuation covers pervasive analysis concerning its financial condition and competitive position with respect to the general market. Financial analysis could consider the aspects of profitability, liquidity, and operational effectiveness using financial statements. Market analysis involves a review of the industry outlook, competition, and market share of the company concerned, as well as possibilities for growth. An operational review consists of an explanation of the company’s business model, management, and strategic operations.
Legal and environmental scrutiny may also be added to ensure that the venture is viable and can be maintained. It aims to present a complete picture that addresses the investors’ or buyers’ ideas about its performance and potential.
Reputation assessment and customer loyalty of a business are crucial milestones when you want to evaluate a business you’re thinking of buying. But why is this aspect so important? Well, it is a fact that a good reputation generally leads to customer loyalty and repeat business, and that has a substantial effect on a company’s bottom line. Does your idea of customer perception make part of the business you intend to consider?
You would also, among others, want to know something about the operational strengths of the business. What keeps the business moving daily? By recognizing these operational strengths, you are sure of investing in a company with, of course, a solid operational foundation.
You cannot invest in just any business, and when it comes to it and you require help; you can hire a professional business broker to help guide your business decisions.
When it comes time to hire an e-commerce business broker, trust WebsiteClosers.com, they have been thriving in the industry since 1998 and, at that time, have helped a vast number of entrepreneurs who were looking to buy a profitable online business.
Thank you for your interest. We're happy to help in your acquisition search.
Please help us by providing an honest review. We focus on those that take the time to review our company.
Leave a Review