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Business In Transformation

A Fix-and-Flip Business-Buying Checklist

A Fix-and-Flip Business-Buying Checklist
Image credit: Shutterstock

One alternative to starting a business from scratch is to buy an existing business and turn it around -- a method that may help you redefine your own thoughts of what a "startup" could be.

The past few years have been very profitable for entrepreneurs with an eye for turning around existing -- but underperforming -- operations, limiting their own risk while leveraging resources that already exist in the business.

Business-for-sale transactions increased in 2012, according to business brokers surveyed by BizBuySell.com, the online marketplace for buying or selling small businesses, and they expect even more businesses to change hands next year. Nearly two-thirds (61 percent) of survey espondents said that there was an increase in business succession in 2012 and about 57 percent forecast a continued rise next year.

What are the advantages of buying into an existing operation?

Related: What to Consider Before Buying a Franchise

Namely, a customer base and some form of existing systems that could continue to be used (or upgraded) or easily replaced with more efficient technology or ways of doing business.

When you consider the expense of a conventional launch or startup, the cost of finding customers, the expenses associated with marketing and advertising, the time required to establish your own set of systems. . . the idea of "buy, build and sell" can be very intriguing, especially if you are just starting out in business.

If you've ever thought about taking an underperforming business off of an owner's hands, there's a lot to consider, especially in terms of the company's current numbers.

Getting to the bottom of a company's real numbers "net-net" can be a challenge in this arena. It's one reason some entrepreneurs prefer to start from their own -- on their own. But the more businesses you look at, the more comfortable you may be in knowing the types of questions to ask and the kinds of numbers to look for.

Also be aware some businesses simply can't or won't be good candidates for turnarounds. Those include bad-concept retail businesses in poor locations, or business-to-business companies in a low demand or crowded markets (or mature markets). They represent opportunities on which you'll want to pass.

Don't worry about those deals. There are better ones around, and the best place to start is to ask the simple question: "Does this company have repeat business -- and how much does it have?"

Repeat business over time equals profits, and if the business is generating some type of cash flow (or even slightly negative cash flow) from repeat customers, there's a good chance the business could generate consistent cash flow and profits with a few tweaks to its current operations.

"Buy, build and sell" or "fix and flip" is the terminology I use for this, but you could just "buy, build and keep" if the operations side of business is what excites you.

Either way, here are some guidelines to consider that just may change the way you're thinking about getting into business. Generally, you're looking for a business that:

1. Survives despite itself: This means the business seems to be making money. It has survived for a while, and continues to, despite poor service, shoddy presentation, bad attitudes from its owners and team or general chaos or disarray.

2. Generates cash flow, as compared to being asset intensive: Buy businesses for cash flow, and leave assets to property investing. Be wary of any business with large asset investments. You're looking for cash flow versus depreciation or being saddled with large stocks of plant and equipment.

Related: A New Reason to Buy an Existing Online Business

3. Can be run with low skills: You're looking for a simple business that sells things people want to buy -- and are buying. Most entrepreneurs won't want an architecture firm or law practice, or any business that requires huge investments of highly technical training or skills to run it.

4. Produces inferior sales and marketing materials: Poor marketing is a good sign of potential opportunity -- because you easily improve marketing that you can track, test and measure. Plus, if you can target it at an existing customer base, you're more than half-way to increasing extended repeat business.

5. Can be run by a great "jockey:" This means you can easily train a manager to go in and run the systems you put in place. This is especially true in a bar (hire a great bartender), restaurant (hire a great chef) or salon (hire a great hairdresser). The idea can be applied to other categories as well.

6. Has a big upside: Look at the numbers. Is it a business that can net you profits of $10,000 per month versus a business that will net you $3,000? Is it running at 25% capacity and can you get it to 75% capacity in a short period of time to sell it or run it profitably? Those are some bottom-line benchmark numbers that can give you guidance in your own opportunities.

7. Is a great deal -- for you. Don't fall in love with the business. Fall in love with the deal. Remember, your profit is always in the purchase price. Every day, owners look to sell for a variety of different reasons. Find a win-win scenario that benefits you both: You get a great deal, and the sellers get the relief of being out of a business they don't want to run anymore, are tired of running or simply have run out of ideas "how" to operate any better.
So. . . change your thinking about "starting up" your new business, and you just might discover a great opportunity in your own neighborhood that you can start to work for a fraction of what it would take to do something else.

Remember, the more you get used to looking at those "deals," the better you'll be at finding the perfect deal for you -- one that will pay off with a big upside more than worth your investment of time and limited resources.

Related: Questions to Ask Before Buying a Red-Hot Franchise

The author is an Entrepreneur contributor. The opinions expressed are those of the writer.

Brad Sugars is the founder and chairman of ActionCOACH. As an entrepreneur, author and business coach, he has owned and operated more than two dozen companies including his main company, ActionCOACH, which has more than 1,000 offices in 34 countries.

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