Industry Insights

Buying a Startup Business: 3 Pros and Cons

Should I buy a startup business and save some money upfront or spend more buying an established business? There are many factors at play that will guide your decision. Some are personal, but most are strategic. In this article, we look at the most significant pros and cons to buying a startup business. We hope this discussion will help guide some of your thinking as you ponder this important choice.

startup business

Buying a Startup Business

Pros

Lower Initial Cost

Starting from scratch usually requires less upfront capital. Low startup costs demand a smaller initial investment, making a startup business accessible to entrepreneurs with limited capital. Businesses with lower startup costs often have simpler operations and infrastructure requirements, reducing the need for extensive initial spending. Starting with lower costs decreases the financial risk associated with a new venture, making it easier to recover initial investments and adapt to market changes.

Vision

You can shape the startup business according to your vision. Ensure that your business's goals are in harmony with your personal aspirations. This alignment helps maintain your passion and commitment. Most business plans include a vision statement that answers the "why" you exist question. Giving thought to your corporate identity will help you create a more compelling product for your customer and help rally employees around a common purpose.

Fresh Branding

You have the freedom to create a unique brand identity. Clarify your startup's purpose, values, and the problem you're solving. This forms the foundation of your brand identity. Design a memorable logo, choose a distinctive color palette, and select imagery that aligns with your brand's personality and message. Use consistent typography that reflects your brand's tone. This typography should be used across all communication channels. Develop a consistent tone of voice that resonates with your target audience. Whether formal or casual, your brand's voice should remain consistent in all interactions. 

Cons

Uncertain Revenue

Generating initial revenue might take time. A startup business often requires time to develop products, build their customer base, and establish a market presence before revenue starts flowing. Investments in product development, marketing, and operational costs can outpace initial revenue, leading to a delayed breakeven point. Building brand recognition and customer trust takes time, affecting the speed at which revenue is generated.

Also, a startup business often faces a learning curve in identifying their target audience, refining their value proposition, and optimizing sales strategies, all of which influence revenue generation. It takes time for startups to stabilize their operations, streamline processes, and gain a predictable revenue stream.

Risk of Failure

New businesses face a higher risk of failure. A startup business often has limited financial and human resources, making it challenging to cover operational expenses, invest in growth, and weather initial losses. Entering a competitive market without a unique value proposition can result in difficulty attracting customers and gaining market share. Insufficient business planning, including lack of market research, financial projections, and contingency plans, can leave startups ill-prepared to face challenges.

Poor cash flow management can lead to an inability to cover expenses, pay debts, and invest in growth opportunities, ultimately resulting in failure. Inflexibility in adapting to market changes, consumer preferences, and technological advancements can render a startup business irrelevant over time. The inherently high failure rate among startups creates an environment where new businesses are more likely to face challenges and setbacks.

Unproven Model

The business model is untested and might need refinement. A startup business operates in a dynamic and uncertain market environment, making it challenging to accurately predict customer preferences and demand. Developing a successful business model is an iterative process. Startups need to experiment, gather feedback, and adjust their models to align with market realities.

New businesses need to validate their assumptions about the target market, customer needs, and value proposition to ensure their business model aligns with actual demand. Business models may need refinement as startups encounter challenges, competition, and changing market dynamics, necessitating adjustments to increase competitiveness and sustainability.

established online business

Buying an Established Business

Pros

Existing Revenue

An established business has a steady revenue stream. Steady revenue provides financial stability, allowing the business to cover expenses, invest in growth, and withstand economic fluctuations. A consistent revenue stream helps in forecasting and planning, allowing better resource allocation and operational efficiency. Reliable revenue supports expansion, product development, and market penetration, driving business growth.

Diversified revenue streams reduce dependence on a single source of income, lowering business risk and increasing resilience. A consistent revenue history enhances the business's value, making it more attractive to investors and potential buyers.

Existing Customer Base

You gain an existing customer base and reputation. An existing customer base means immediate revenue from loyal customers, reducing the need for time-consuming customer acquisition. The product or service has already been tested in the market, minimizing the risk associated with unproven concepts. An established brand and reputation contribute to customer trust and loyalty, enabling faster business growth. Access to existing suppliers and established relationships simplifies the supply chain and procurement process.

Buying an existing business saves time compared to starting from scratch, allowing for quicker returns on investment. The business comes with established processes, policies, and operational knowledge, facilitating smoother business operations. Access to financial records and performance history aids in making informed business decisions and securing financing. An existing customer base provides a foundation for introducing new products or services and expanding the business.

Proven Model

The business model and strategies are already proven. The business model has been tested and demonstrated to work, reducing the risk associated with unproven ideas. A proven business model comes with existing customers, generating immediate revenue. The business likely has an established brand, contributing to customer trust and loyalty. A proven business model often includes efficient operational processes and systems, leading to smoother operations.

Banks and investors are more likely to finance a business with a proven track record and established business model. Buying an established business with a proven model can lead to quicker returns on investment compared to a startup business. The business's historical performance and financial data provide insights into its potential future performance.

high initial cost

Cons

High Initial Cost

Purchasing an established business can be expensive. The cost might be justified by the established customer base and revenue stream, leading to quicker returns on investment. Existing operational processes and trained employees can justify the high cost by providing operational efficiency from the start. Despite the high initial cost, it may save money on start-up costs such as inventory and marketing, compared to buying a startup business or starting a business from scratch. The cost might be justifiable due to the existing goodwill, brand reputation, and customer loyalty associated with the business. Compare the cost of buying an existing business with starting or buying a similar business to determine the overall financial advantage.

Limited Changes

Existing processes and branding might limit changes. The advantages of established branding include attracting customers and revenue, but changing it might confuse customers. Similarly, existing internal processes might provide efficiency, but altering them could disrupt operations. The decision to change these aspects depends on a careful analysis of how changes would impact the business's identity, customer relationships, and operations. It's essential to balance the benefits of established elements with the potential benefits of change, considering the overall strategic goals of the business.

Legacy Issues

There could be hidden problems or debts to resolve. Due diligence is crucial to uncover potential issues such as unpaid debts, misrepresented financial data, or undisclosed liabilities. Even with a thorough review, there's still a risk of encountering problems that were not initially apparent. Conducting comprehensive due diligence, including examining financial records, legal agreements, and business operations, helps mitigate these risks. It's advisable to involve legal and financial professionals to ensure a smooth transition and address any hidden issues before finalizing the purchase.

Each business acquisition option has its merits and challenges, depending on your goals, risk tolerance, and available resources. To get started, you can search established or startup businesses for sale through the DealLink platform.

1st photo by RDNE Stock project. 2nd photo by Photo by Canva Studio. 3rd photo by Photo by RDNE Stock project.

Buy a Business: Risks and Rewards

Introduction

It’s a common problem - you’re an entrepreneur with a burning desire for success. Yet you can’t seem to get your business ideas off the ground, or scale them to the size you want.

Many entrepreneurs have realized that to buy a business is often the smoothest path to running their own successful company. By buying an existing business, you can gain access to companies that are already established and ready for the next level of growth.

When you start a business from the ground up, it can be a difficult process: time-consuming, overwhelming, and highly risky. To avoid these potential dangers, a smart alternative is to buy an established business.

In this blog post, we'll take a look at why purchasing an established business is often the better choice for savvy entrepreneurs who want to hit the ground running with minimal risk and time investment. From fully developed products and services to ready-made customer bases, learn why investing in an established online presence can provide powerful opportunities for long-term success.

buying an established online business

Should I Buy a Business?

If you're an entrepreneur looking into running your own business, you’re probably thinking of building a business from the ground up. Yet, have you ever considered buying an existing business? By buying a profitable business that’s for sale, you get instant access to loyal customers, consistent revenue streams, and established business processes. While each option has its own advantages, there are distinct benefits to buying an established business. We explore a few below:

1. Leapfrog the business-building stage

Investing in an established business can be a great way to jumpstart your entrepreneurial journey and see the rewards of your efforts much sooner than if you had started from scratch. Buying an already existing business means instead of having to develop something new, you can adopt and further optimize an established process that has already proven to be successful.

2. Reduce your risk

Many entrepreneurs and small business owners rarely consider growing their business through acquisition. Yet, buying an existing business can be less risky for an entrepreneur than starting a new business or product/service line from scratch. An established business has already gone through the initial stages of development, such as creating a brand, building a customer and supplier base, and developing products or services. It likely already has a track record of performance, including revenue and profits, which provides a level of predictability and reduces uncertainty.

You, as the new owner, can leverage the existing infrastructure and analyze existing data to identify trends and make better informed decisions about how to improve the business. This should save you the time and effort required to test new markets or product/service lines, fast-tracking your path to earning a return on investment.

3. Resources are already available

With a pre-existing business, the resources and infrastructure are already in place. This means that you don’t need to waste time attempting to build the back end of your business from the ground up. You can build from what is already in place.

When you buy a business, you also can review the product or service development plans and roadmaps they have in place. Being able to choose a business with a plan that you believe sets it up for success, or is adaptable enough to suit your goals for the business saves you significant time and effort. Someone else has already done the majority of the trial and error for you.

4. Leverage past sales & marketing data

The sales data of the business you plan to buy is integral in understanding its historical performance and future potential. You’ll gain immediate insight into customer personas and potentially even past tactics they’ve tried which have both succeeded and failed.

Marketing data offers you a wealth of information regarding how prospective customers have responded to different marketing tactics. By buying an existing business, you’ll get access to potentially years of data from trialling different strategies from day one. This will provide valuable insight into tactics that resonated with customers and those that didn’t, how to best penetrate target markets, access to industry-specific contacts, and how to best leverage customer loyalty.

5. Brand-building phase: Done

By buying an established business, you know the brand-building phase has already been set in motion. You only need to continue building on established customer trust and reputation with customers and leads already familiar with the brand.

6. Marketing materials ready

Another advantage of buying a company is that they likely already have existing marketing plans and collateral. These can range from professionally designed and managed websites, blogs, and social media accounts to a library of content such as images, articles and email newsletters already prepared for you and your customers. Having these ready-made materials presents a consistent and coherent brand that won't need to be re-established, ensuring customers continue to receive consistent and clear messaging about your business and its purpose.

7. Established supplier relationships

The strength of existing supplier relationships should not be overlooked when buying an established business. Taking on a business where relationships are already in place will allow you to benefit immediately from access to inventory, established ways of working and historical data. It’s much easier to negotiate favorable terms with existing than new network partners.

8. Live website and established SEO

When you buy an existing company, you are instantly getting access to a website that is already live. This saves you both time and money as it eliminates the need to build a functional website from scratch. Instead, you’re free to focus on business growth or expansion plans. The house is already in order, you can just focus on renovations.

A well-optimized website can also provide numerous benefits for businesses, regardless of the platform used, such as Shopify, Squarespace, or WooCommerce.

Firstly, it means a better user experience, which can lead to increased engagement, longer session times, and a higher likelihood of converting visitors into customers. A professional and well-designed website can instill confidence in the business, increasing the likelihood that customers will make a purchase.

Secondly, this also means it’s likely to have already started working on its SEO strategy, which means it’s likely to rank higher on search engines, and make it easier for new customers to find their way to you. By buying a company with a track record of attracting organic traffic to its website, you gain predictability and reduce uncertainty.

9. You know your customers

Access to key customer data can be incredibly valuable when buying an established business. This data can provide insight into the behaviors and preferences of the business's existing customer base, allowing you, the new owner, to make informed decisions about how to market and grow the business. With this information, you can tailor their approach to develop new products or services that align with customer needs, and create more effective marketing campaigns.

Additionally, customer data can be used to analyze trends and identify areas for improvement, such as optimizing the user experience on the website or streamlining the checkout process. Overall, access to an existing wealth of customer knowledge can provide a powerful foundation for the future success of an online business.

10. Your customers know you

A solid customer base provides a foundation for the business and can be leveraged for future growth opportunities. You immediately gain access to an established customer base and can build upon it with their own marketing strategies. In contrast, building a customer base from scratch can be challenging and time-consuming. Furthermore, an established customer base provides a level of predictability for future revenue streams, making it easier to project financial performance and secure future funding, if required.

11. Positive customer reviews

Did you know that 49% of customers only buy from businesses they trust online? By reading what other customers have to say, aside from you, potential buyers are also provided with valuable insight into the business and its operations.

The quickest way to build that trust is by having good feedback and positive reviews about your business. These can prove invaluable to its growth, giving your company credibility, and generating organic sales through referrals.

When exploring businesses to buy, keep an eye on their existing customer-provided ratings and reviews. You’d be surprised by how much customer reviews mean for a business’ long term viability!

12. Proven business model

A proven business model is one that has already demonstrated its ability to generate revenue and profits consistently over time. By buying a business with a proven business model, you can leverage the existing infrastructure and established customer base, which can save time and resources compared to starting a new business from scratch.

Instead of spending your time working out the best way to start making sales, you can focus on building upon the existing business model by implementing new marketing strategies, introducing new products or services, or by expanding into new markets.

fast track your ROI

Ready to Fast-track your ROI?

Starting your own business can be exciting. However the path to success is often a long journey that involves a lot of hard work. While the cost of buying a business may seem more than you’re willing to invest upfront, compare it to other costs traditionally involved in starting your own business: hiring and training staff, testing different marketing strategies, designing your website and/or Shopify store, learning how to best set up your site to succeed within the algorithms….

Often, buying and maintaining an already profitable business ends up being more time and cost-efficient for entrepreneurs. This means you can focus on optimizing an existing business with your specific skills and knowledge. By leveraging your abilities on an existing business, you’re likely to see a faster return on investment.

Where to Find Established Businesses?

Researching your options is the first step in your business buying journey.

Broker Listing Sites

Listing platforms usually feature a variety of businesses for sale, ranging from niches of e-commerce sites to content-driven blogs. Some popular platforms include:

Empire Flippers

Website Properties

Latona's

Quiet Light

App Business Brokers

Foundy

Flippa

Investors Club

Entrepreneur Networks

Another way to find established businesses that are for sale is to network with other entrepreneurs in your industry or attend online business conferences and events. Don’t forget to do your due diligence before committing to a purchase though!

Buy-side Brokerages

Buy-side brokerages provide significant value in helping to match potential buyers and sellers. These platforms offer a marketplace where prospective buyers can browse and search for businesses that match their interests and investment criteria.

By using a buy-side broker, buyers can get guidance in the search process as well as access to a wider range of online businesses for sale than they might find through traditional channels. This can increase the chances of finding the right business to purchase.

Buy-side brokerages also provide a range of services to help facilitate the buying process, such as due diligence, financial analysis, and transaction support. This can save buyers time and resources compared to conducting the process independently.

Additionally, buy-side brokerages often provide financing options for buyers who may not have the full amount of cash required to purchase a business outright. This can provide you with access to capital and make it easier to buy and start running your own business.

buying an existing business

What are the Risks of Buying a Business?

It’s important to know that whether you buy a business or start one from scratch, there are always risks involved.

1. Accurate valuation

One of the biggest challenges when it comes to buying an existing business is accurately valuing the business. Business valuation is a complex process that involves assessing various factors, such as the business's financial performance, industry trends, market demand, and growth potential. It can be difficult to obtain accurate and reliable information about the business, particularly if the current owner is not forthcoming with details or if the business lacks detailed financial records.

When considering buying a business, you need to ensure that its assets, liabilities, and legal obligations are properly evaluated and disclosed before the purchase. This requires a thorough due diligence process to identify any potential issues or liabilities that could impact the value of the business or pose a risk to the new owner. You also need to consider its sources of revenue - over-reliance on a single website traffic source, specific season or service, or revenue derived from questionable marketing practices may increase the risk of unsustainable long term revenue.

2. Reliance on current owner

Many businesses are small and may be heavily reliant on the current owner's knowledge, expertise, and relationships. If the owner leaves the business or is unable to transfer their knowledge effectively to you, the business may suffer.

Make sure all processes are documented and you fully understand how a business handover will work.

3. Unclear Branding

Make sure you’re comfortable with the current branding, or have a clear plan to change or update it. Unclear or inconsistent branding can create confusion among customers, leading to decreased trust and sales. Additionally, rebranding an established business can be a challenging and expensive process that may require a significant investment of time and resources.

The potential roadblocks concerning unclear branding can be countered by thoroughly doing research as to whether if it can effectively be built on for success.

4. High Competition

Businesses can be particularly vulnerable to competition as the barriers to entry are relatively low, and there may be many competitors offering similar products or services. If the business you want to acquire is in a highly competitive market, chances are, you may struggle to attract new customers and differentiate your business from the competitors.

Buying an established business means taking on its existing competition. While it may be profitable now, you need to be aware of your competitive environment and be responsive to changing trends and pricing.

5. Changes in technology or regulations

The landscape is constantly evolving, and new technologies or regulatory changes can disrupt established business models. You need to be prepared to adapt and change quickly to remain competitive.

Further, web-based businesses may be vulnerable to fraud or cybersecurity breaches, which can damage the business's reputation, customer trust, and financial performance.

6. Overleveraging

Overleveraging occurs when a buyer uses too much borrowed money to acquire a business, and the resulting debt burden becomes unmanageable. Online businesses, in particular, are susceptible to overleveraging because they often have lower startup costs than traditional brick-and-mortar businesses, and you as a buyer may be tempted to take on more debt to fund the acquisition.

Overleveraging can also lead to a lack of flexibility in managing the business, as this may force you to make decisions that prioritize debt repayment over business growth. It can be damaging to the progression of your business and may take years to reclaim the money owed or accrue new funds. Therefore, it is essential to carefully consider the debt levels that you can realistically manage before acquiring any business.

7. High Maintenance Requirements

It's no secret that having a business requires a significant level of ongoing maintenance to ensure that your website or e-commerce business is functioning correctly, the content is up to date, and any technical issues are resolved promptly. Depending on the type of business, maintenance can be time-consuming and will require specialized skills.

This may take away other necessary business activities and find yourself spending significant amounts of money and time on maintenance rather than investing in marketing and growth strategies for your newly acquired business. Ensure you have, or can afford, the required resources and skills to keep the business running smoothly.

Summary: Buy a Business

Buying an established business can be a complex and challenging process, and you as a prospective business buyer need to carefully evaluate and mitigate these and other risks before making a purchase.

However, there are clear advantages to buying and scaling an already established business. From existing customer and supplier relationships, recurring revenue, reputation, systems and historical data, you can leverage the expertise of the previous owner, avoid the steep learning curve associated with starting a new business, and ultimately grow the business quicker and more profitably. Good luck!

Photos from Pexels.com: by Vlada Karpovich, Liza Summer, and Rodnae Productions.

Selling a Business Within 5 Years? 7 Best Things to Do Now

Most business owners approach selling a business much like my son approaches his homework – they avoid thinking about it until they absolutely have to. It’s understandable. For many owners, their business is their baby, their employees are their family, and they enjoy the challenge and sense of purpose derived from their work. That said, when it comes to selling, business owners owe it to themselves to begin planning early.

Good preparation leads to a significantly improved outcome – including a higher purchase price, shorter time on the market, and fewer post-transaction requirements. If you are thinking about selling a business within the next 5 years, here are the 7 best things you should do now.

selling your business within 5 years

Focus on Growth and Profitability

Generally, buyers will ask for 3 to 5 years of financial statements as part of their due diligence. Buyers like to see year-over-year growth, and consistent or growing margins. Additionally, the valuation a buyer places on your business will likely be tied to your financial statements. Therefore, it makes sense, in years leading up to a sale, to focus on growth and profitability. Consider developing a business plan to accomplish specific goals within the timeframe you have prior to exiting. To address revenue growth, your strategy might include adding a second shift, launching a new product or service, or hiring additional sales personnel.

To address profitability, you might look to increase prices, eliminate non-essential processes, or reorganize your physical space. Regardless of your strategy, make sure your goals align with your time to exit. Moving to a larger facility, for example, might be a good long-term initiative, but require more time than you have to favorably impact your financial statements.

Tee It Up for a Buyer

Any steps you can take to simplify an acquisition and better position your company for a buyer will improve its valuation. This might mean changing the structure of the business, solving capacity issues, rebranding, or putting better systems and processes in place. If, for example, you have a slow-growing legacy business under the same roof as a new, rapidly growing division, it might make sense to separate the two. Or, if you’re in an industry that is facing some headwinds, you may benefit from getting a foothold in a new market. Think about who your buyer is likely to be, and what they will be looking for in an acquisition – then work to position your business accordingly.

Make Yourself Redundant

The less dependent your business is on you, the more valuable it will be to a buyer, and the more likely you’ll be able to exit without a lengthy transition. If you currently play a critical role in day-to-day operations, look for ways to hand off some (or all) of your duties prior to selling. This might mean hiring and grooming your replacement, transitioning customer relationships to others, or giving more responsibility to your management team.

These are not easy adjustments to make. It can be challenging to trust your team with key functions, and there is some risk that changes could create problems. However, if you are successful in building a structure that allows the business to run independently, it will be a significantly more attractive acquisition candidate. Some owners decide after taking this step that they don’t need to sell after all, instead holding on to what essentially becomes an “annuity”.

move toward predictable revenue

Move Towards Predictable Revenue

Perhaps the most important determinant of value is the extent to which a buyer can predict revenue (and profit) post-transaction. Businesses with lumpy sales, whether project-based, cyclical, or otherwise, tend to be discounted. So, think about ways you can move towards predictable revenue. You might look to roll out a subscription model, offer a maintenance program, or simply ask your existing customers to sign long-term contracts with purchase commitments.

If your business is cyclical, there may be steps you can take to normalize income. A company selling ski accessories with heavy sales in the winter might look to get into beach products. Owners with highly predictable revenue often command a valuation multiple of sales vs. profit, so taking steps in this direction could be rewarding.

Keep Straightforward, Accurate Financials

One of the first steps a buyer will take is to review 3-5 years of profit and loss, cash flow, and balance sheet statements. It is important that you have these statements available, and that they provide a true picture of your business’ financial state. In years leading up to a sale, businesses should make sure they are keeping up with the basics, including taking regular inventory, reconciling bank statements, and properly accruing expenses. While audited financials are not necessary (and are rare for small businesses), buyers do look favorably upon them.

A less expensive alternative is to have your financials reviewed. It might be helpful to hire a CFO or controller, even if fractional/part time, and/or to engage a CPA firm familiar with your industry. Lastly, consider changing any “write off” habits leading up to a sale. While most business owners look to expense everything possible to keep profit and taxes at a minimum, a lower profit on your books could translate to a lower valuation.

Address Risk Areas

Some risk areas for a buyer include customer or supplier concentration, pending legal issues, old equipment, insufficient IP protection, or a lease without an option to renew. With a sufficient time-horizon, all of these areas can be addressed and improved. If you have one customer that comprises 25% of revenue year after year, focus on building other relationships and bringing on new customers to reduce the concentration. If your equipment is old, look to update it prior to a sale. Like selling a house, fixing any problems prior to selling will make for a smoother transaction.

net result

In Selling a Business, Know What You Need to Net

An important step in preparing to sell a business is to assess what you will need to net. Is there a number below which it would not make sense to sell – whether for retirement, an investment, reduction of debt, or another purpose? If so, you will benefit from working with your CPA (or another knowledgeable professional) to assess whether you are likely to achieve that number, after taxes, from a sale. Understanding your target will help you to determine your timeframe, and any steps you may need to get there.

So, as hard as it may be, it’s worth thinking through your exit plan if you expect to be selling a business in the next 5 years. You may well be able to identify a few areas where modest steps can have a significant impact on the process and net result.

Images from Pixabay.

Search Funds: An Alternative Exit to Consider

If you’ve ever purchased insurance for your cell phone you might be familiar with the company Asurion, the global provider of device insurance, warranty, and support services. What you might not know is that Asurion was one of the early “Search Fund” successes, grown from a company purchased in 1994 by two Stanford MBAs with backing from Search Fund investors. The business had 40 employees when they bought it; Asurion now has over 23k employees and is a multi-billion-dollar, industry-leading company.

5 reasons to consider selling your business to a search fund

How The Search Fund Model Works

The Search Fund model, where entrepreneurs, often recently-minted MBAs, acquire closely held businesses, has proliferated since the first funds launched in 1984. The 2022 Stanford University Search Fund Study indicates that in 2020-21, there were 124 Search Funds launched and a record $776 million invested in the funds and their deals. Backers can include experienced individual and institutional Search Fund investors, in addition to business owners, executives, associates, and friends and family. Searches are generally funded for 24 months, so the entrepreneurs involved are highly motivated to find and close on the right deal. Recurring revenue businesses with $2 million EBITDA+, including SaaS, subscription, and other tech-enabled services, are of primary interest to these funds and their investors.

Unique Qualities

The Search Fund model has some unique qualities when compared with other business acquirers of closely held companies. These funds blend the motivation, passion, and smarts of entrepreneurial MBAs, with the wisdom, experience, and deep pockets of their investment team. It’s a unique hybrid approach to business acquisition offering an exit worth considering for the right business and owner. 

Here are 5 reasons to consider a search fund buyer when selling your $2 million+ EBITDA, recurring revenue business:

1. No lengthy transition or owner handcuffs

Because Search Fund operators seek to acquire just one business and run it themselves, there is less need for owners to stay on post-transaction. While some transition is generally required to ensure the new team is positioned for success, the new owners usually seek to take the reins as quickly as possible. Private Equity groups and strategic buyers, by contrast, may require the seller to stay on for a period of time and are more likely to require the owner to roll over equity or tie a portion of the purchase price to achieving goals after the transaction.

2. Preservation of your brand and legacy

Business owners are often coached by CPAs, bankers and brokers that strategic buyers are the best option when considering an exit. Whether a competitor, customer, supplier, or other industry player, “a scenario where 1+1=3 will yield the best outcome”. While it’s true strategic buyers generally have more valuation flexibility than financial buyers, they are typically seeking to roll the seller’s operations into their own. Likewise, Private Equity firms often seek to grow businesses through acquisition, consolidating operations. In either case, your brand and legacy could get lost in the shuffle. As entrepreneurs and owners themselves, Search Fund operators are more likely to become invested in what you’ve built, keeping your brand and legacy intact.

3. Fair purchase price

The median purchase price for a Search Fund acquisition during the 2020-21 timeframe was $16.5 million. Median purchase price multiples were 7.3x EBITDA and 2.1x revenue. For those funds reporting a multiple of Annual Recurring Revenue, the median multiple was 3.4x ARR. While 2020-21 multiples were higher than for prior periods, possibly reflecting the overall economic cycle, these averages are generally in line with other financial buyers for businesses of this size, whether private equity, family office, or otherwise.

4. Potential for a cash deal

While they do not have “committed capital,” Search Funds are typically well set up to finance a deal. Their investors provide the upfront capital for the search itself, usually $400k+ per searcher, in exchange for the right to invest once a deal is identified. With an aggregate pretax return of 35.3% internal rate of return (IRR), investors are generally eager to participate in good deals. Since 2015, each Search Fund acquisition has had a median of 16 investors. With the equity portion of the deal covered, Search Funds can then use debt to fund the remainder. As a result, there is often potential for a mostly, if not all-cash deal.

5. Employees are more secure post-transaction

With a median age of 32, Search Funders are young entrepreneurs. Most will not have been in a CEO role prior to their acquisition. As a result, they favor acquiring companies with a solid employee base that can support them as incoming CEO. They are ideally not looking to make significant staffing changes. By contrast, strategic buyers often seek to eliminate redundant positions and Private Equity buyers seek to streamline operations. A Search Fund might be the buyer most likely to retain and support your employee base after a transaction.

source of funds

Source of Funds

If you are considering a sale to a Search Fund, it’s important to understand the source of the fund’s capital. On one end of the spectrum, there has been a proliferation of free agents calling themselves “Search Funds” that have not actually raised capital from external investors. On the other end, much of the equity into Search Funds now comes from firms with committed capital funds themselves. Engaging with a non-funded group significantly increases financing risk, while engaging with a group backed by investors with committed capital significantly decreases it.

Bottom Line

Selling to a Search Fund with strong backing can be an interesting exit alternative for owners of businesses with predictable revenue and $2 million+ EBITDA. The model has some unique attributes allowing benefits to the seller that may be unavailable with other types of acquirers. If you are looking to sell a business that fits this profile, it’s definitely worth considering a search fund buyer.

Images from Pixabay

Business Brokers: 7 Good Reasons to Hire One

As a business owner and entrepreneur, you’ve likely poured your heart and soul into your company. So, when it comes time to sell, how can you ensure the best possible outcome? Looking into business brokers can be a great place to start. Here are 7 reasons why you should consider hiring a business broker to help sell your company:

hiring a business broker

1. Accurate business valuation and financials

Determining the value of your business requires both knowledge of valuation methodologies and an understanding of the landscape of buyers. A good broker will know how to properly normalize your income statement and how to apply a multiple-of-earnings assessment or alternative valuation methodology. Equally important, a broker will know whether your business is a candidate for a strategic acquisition, and how to price it accordingly. Finally, buyers prefer to purchase businesses represented by a professional because the financial information has been vetted by a third party.

2. Effective marketing

An experienced business brokerage will know how best to position your business to attract qualified buyers. Quality marketing materials, including a “teaser” summary and comprehensive overview of the business, will help attract the best buyer candidates and weed out unsuitable buyers. Brokers may also list your business for sale on their website as well as marketplace websites to target acquirers of companies that fit your size and profile.

3. The right buyers at the table

The universe of potential buyers for your business may be wide and diverse – from individual entrepreneurs, search funds, and fundless sponsors to strategic acquirers, private equity firms, and aggregators. There are pros and cons to each. A good broker will have in place a robust buyer network, as well as resources to reach additional candidates, so the right parties are at the table. Additionally, a broker can help screen buyers to ensure they have the financial wherewithal to acquire your business, and the right skills to operate it.

effective negotiation

4. Effective Negotiation

Purchase price is just one component of an offer. Deal terms, too, significantly impact the attractiveness of a proposal. Is the buyer seeking seller financing or performance-based compensation? Are you required to stay on for a lengthy transition? A broker can help you navigate terms, make informed decisions, and communicate effectively with the parties involved. Additionally, business acquisition negotiations can be emotionally charged. An experienced broker will help the parties keep emotions to a minimum and stay focused on a mutually beneficial outcome.

5. An Outsourced, Efficient Process

Running a sales process can be time-consuming and exhausting. In addition to preparation, the seller will need to manage multiple negotiations and respond to ongoing requests for information. Most business owners have their hands full just running their business. So, it makes sense to outsource much of the effort to a professional. A broker will help you avoid any business performance issues that might emerge if you are pulled in too many directions during the process.

6. Confidential Dialog

A sales process requires disclosure of confidential information to multiple parties. Without the assistance of a business broker, it can be difficult to confidentially engage with potential buyers. A broker can approach buyers, even competitors, with a “blind teaser,” followed by a non-disclosure agreement (NDA) before any information is exchanged. Likewise, a broker is less likely than a business owner to inadvertently alert employees or other stakeholders of the sale.

7. Documentation

There are a number of legal documents involved in a business sale transaction, including an NDA, Letter of Intent (LOI), and Asset or Stock Purchase Agreement (APA or SPA). While it certainly makes sense to engage an attorney when developing documents, a broker can help defray legal costs with access to boilerplate templates, past agreements, and a working knowledge of the key terms and opportunities for negotiation. Leveraging the knowledge of a broker to help with these agreements, while engaging your attorney for document review and counsel on key deal points, can be an effective division of labor. Finally, a business broker can assist in the transfer of assets at the conclusion of a successful sale.

Accessing Business Brokers

If interested in looking into business brokers, you can access our advisor network that can help narrow your search. 

Business Purchase Closing: Getting Ready for the Big Day

 

Shake my handBusiness Purchase Agreement & Closing

Depending on the complexity and size of the transaction, a business purchase agreement template can be very simple or very complex. While a simple transfer of a digital asset may only require a bill of sale, the acquisition of an income-producing business is typically accompanied by an Asset Purchase Agreement (APA) or Stock Purchase Agreement (SPA).

Most acquisitions are asset purchases, meaning that the buyer transfers the tangible and intangible items owned by the company from the seller’s corporate entity into a different corporate entity owned by the buyer. These items generally include everything from the website, customers, and inventory to trademarks, patents, and goodwill.

By contrast, in a stock purchase, the buyer acquires the seller’s business entity itself, which includes all of the assets and liabilities contained within. In either case, you will want to work with an M&A attorney and CPA to help you decide which route is best for your situation based on the legal, financial, and tax implications of your purchase. Since most owner-operated business transactions are asset purchases, we will focus on things to consider when drafting your APA. 

asset purchase agreement

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Asset Purchase Agreement (APA)

The APA is generally a far more robust document than a Letter of Intent, often 20-40 pages, addressing many of the same items as the LOI but in greater detail. The key elements of an APA include a complete list of the assets being purchased (and not being purchased), liabilities assumed, the purchase price and how it will be paid and allocated for tax purposes, details on the closing and post-closing adjustments, seller and buyer representations and warranties, and the handling of disagreements post-transaction.

There are typically schedules attached to the APA, including financials, organizational documents, contracts, permits and other key items upon which the purchase decision was based. Lastly, there are often separate agreements simultaneously signed at closing that handle elements of the transaction that fall outside of the APA, such as non-compete or consulting agreements. A few things to consider when working with your attorney to draft an APA:

  • Be specific when identifying included assets – detail domains, content, subscriptions, plugins, contracts, inventory and all other components of the business
  • Confirm that the seller owns the assets you are buying and that they are transferable to the new corporate entity.
  • Think through how you can retain some leverage with the seller post-transaction. A seller note or escrowed funds will leave you in a stronger position if, for example, the seller does not deliver on training or other promises.
  • Consider language where you have recourse if the seller does not deliver on promises (e.g. the seller note is reduced accordingly).
  • Optimize the asset allocation and explore creative ways to minimize taxes on the deal – with different depreciation schedules, some asset categories are more tax friendly for the buyer than others (e.g. “Personal Goodwill”)
  • Small deals do not need big contracts – speak up if you feel the template your attorney is working from is overkill.

Summary: Business Purchase Closing

  • Have I carefully read the Asset Purchase Agreement draft?
  • Have I confirmed asset ownership by the seller?
  • What am I asking of the seller post-transaction?
  • Does the agreement fit the deal being signed or do I want something simpler or more complex? 

We hope you took away a few insights that will help you successfully complete a business purchase transaction. Remember, it is always a good idea to have an attorney and/or accountant review any document before signing it. 

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