How To Find, Fund, Fix and Flip Businesses for Profit
No matter what state the economy is in, there will always be people who want to sell their businesses.
Perhaps they’re ready to cash out and retire. Or they’re keen to pursue another venture. Maybe they just don’t want to be a business owner any longer.
This means that there are always opportunities to find, fund, fix and flip businesses for profit. And you don’t need to have an MBA or degree in accounting to buy other businesses. But when it comes to assessing, negotiating and signing the deal, you should use the services of a lawyer with M&A expertise, a tax specialist and a financier who can if necessary, help arrange funding.
So how do you find, fund, fix and flip businesses? By taking the following 11 steps:
Set Your Personal and Business Strategy
Establishing your personal goals and the overall business plan is essential as everything will flow from that. For instance:
- Do you want monthly cash flow, growth in the value of the business or both?
- Do you want to be hands on or hands off?
- Do you want to build a business empire or something more modest?
- Do you want to buy smaller businesses with up to one million in annual revenue or larger ones?
- What are your strengths and weaknesses?
- Do you want to buy a successful business or a distressed one?
Find Motivated Sellers
Don’t restrict your search to business for sale brokers. Talk with people in your network. Contact accountants, your bank, solicitors, and financial advisors and let them know you’re looking to buy.
You’re probably going to be looking at dozens of deals, so you’ll need to have a quick way to assess whether a deal is worth further investigation. And you will need to be organised since you might be considering dozens of deals at a time.
Meet Your Acquisition Target
When you first meet the owner of the company you want to acquire you need to have a set of questions ready, and you must be prepared to answer questions too. You’ll want to know things such as the company’s turnover, its assets, its cash flow and margin, the value of its contracts and debtors book and the number of clients it has. You’ll also want to know how long it’s been trading.
This first meeting and the rapport you build is key to the successes of the deal. If the current owner doesn’t like you or believe that you can make a success of the company, you won’t be able to buy it. If all goes well at the initial meeting, you’ll have to arrange follow-up meetings to discover more about the company.
Do A Valuation and Make an Offer
This is where you value the business, negotiate and structure the deal, so you don’t have to put any of your cash into it. You will either pay something or nothing upfront. Getting this structure right is essential. You might, for example, buy 80% of the company and keep the owner in place to run it, or instead, offer the management a share in return for contributing to the company’s success.
Before buying a ‘distressed’ company, you will need to decide how you can turn the business around and then create a plan of action.
There are actions you must take if the company is insolvent and you need to act quickly on these. If you do this properly, however, you can eradicate the debt the company has—completely legally—and start afresh with a clean slate.
Use Creative Financing
If you have to raise some finance to cover the deposit part of the payment, you need to discover what company assets you can borrow against. You then need the right lender to put the finance together so that on completion you have the money available to pay the seller.
The company will make the balance of the payments from its cash flow.
Carry Out Due Diligence
You need to forensically examine every aspect of the business so you can understand exactly what you are buying, where the liabilities are and how to protect against them. You need to pay attention to tax issues and staff issues and the company’s assets.
Close the Deal
It’s essential that you use an experienced Mergers & Acquisitions lawyer who will take care of things such as seller non-competes and warranties. If the business is distressed, you might do a pre-pack administration as part of the completion where you buy the assets from the Administrator and can rid yourself of the seller’s debts.
Your First 100 Days of Ownership
You need to implement your plan to stabilise and then grow the business. I’ve got a dozen action steps to take on day one.
Build Your Portfolio Towards Financial Freedom
After buying your first business, you can begin to build your portfolio. You have several choices:
Buy completely unconnected businesses but benefit from cost reductions in shared offices, admin, finance, HR, marketing, etc.
Buy very similar businesses and roll them up into one business.
Buy businesses with the same customer base and cross-sell.
Growth & Cost Reduction
At this stage, you need to focus on two things: cost reduction and sales growth.
- Reducing costs and sharing costs across companies or benefiting from economies of scale has an immediate benefit on the bottom line and makes your business (or businesses) more profitable.
- It’s highly likely that the businesses you have bought have terrible marketing. By implementing a simple marketing strategy to bring in more customers you help your business to grow—and a growing business is the best kind to sell.
Make Your Exit
By this stage, you have a growing business that didn’t cost you any of your own money to buy. At some point, you will want to exit. You (and your shareholders) need to ensure that you get the right price and the right terms.
It doesn’t matter if you haven’t paid the original seller of the business in full—they will be paid from the money you receive from the sale.
And then you’ll be ready to move on to your next business purchase