The Top 5 Reasons Why People Buy a Business When in the market to buy a business, make sure you are clear on the reasons you are buying the business in the first place.
By George Deeb Edited by Micah Zimmerman
Key Takeaways
- Know your endgame before buying — investment goals shape every decision.
- Choose businesses based on cash flow, ROI, or family legacy.
- Passive income or ownership as employment? Be honest about your needs.
Opinions expressed by Entrepreneur contributors are their own.
Many entrepreneurs go down the path of buying a business to help jump-start their business-building efforts. But oftentimes, they don't give enough thought to "why" they are buying the business, and the long-term goals they are hoping to accomplish from this investment.
Unless they are 100% clear on the "end game", they could get themselves into a situation that is not what they intended, and it could be too late to fix it once they close on the purchase.
These five reasons will help you assess your acquisition goals before you get started hunting for targets, so you don't repeat the mistakes that many other entrepreneurs have made by not doing sufficient homework upfront.
1. You need a high return on investment
Like any other investment, you want it to be worth as much as possible at the time you are ready to sell it. This path most typically involves buying a business at a low price, increasing its value over the next 5-10 years through increased sales and marketing efforts or other margin enhancement techniques, and then selling it for a much higher value down the road.
That higher value typically comes from two sources: the higher profits of the bigger business and the higher sale multiple of earnings, as bigger companies are typically sold at higher sale multiples than smaller companies. But the intent here is to buy and sell the business — that is the intent from day one.
It may or may not require you to raise outside capital to assist you with the purchase or your scaling efforts. If all goes well, you sell the business at 5x-10x the price you purchased it, and that is when you get your "big payday" as a shareholder.
2. You need current recurring cash flow
In this category, it is less about growing a business and more about "milking it" for recurring cash flow from whatever size the business is today. Here, it is less about shooting for the highest long-term ROI possible and more about driving the highest near-term annual return on invested capital. These investments can be things like buying a car wash, a strip mall to rent or a restaurant franchise where you are hoping to drive 10-20% annual returns on your investment.
This is basically a more hands-on alternative to investing in the stock market or other more traditional investment vehicles. It may or may not require an investor partner, like a family office, that is also looking for current recurring cash flow. This path is preferred if you need current cash and are not planning to reinvest annual profits into the future growth of the business, as you were doing in the first category.
3. You are creating a family legacy
In this category, there is simply one goal: owning and operating a family-run business that you can hand off to future generations. It could come in the form of either of the first two categories above, with one primary difference: you would not want to take any outside investors, as they will require an exit strategy down the road and may require you to sell the company to achieve that goal, which defeats of the whole purpose of ending up with a business you can hand off to your family members.
The other major difference here is that now there may be multiple opinions around the family dinner table in terms of what types of business they would enjoy operating. So be sure to toss around those mutually acceptable ideas as a group, before you get started, so there are high odds the next generation will enjoy working in the business and will want to take it over when the older generation retires.
Related: 5 Factors You Must Consider When Buying an Existing Business
4. You need passive income
Another type of business you can buy is one that comes with very little work required by buyers in terms of operating the company. Businesses that basically "run themselves". This could be things like buying a parking garage, or a business that places vending machines in retail locations, or a business that comes with a general manager who will be doing the majority of the work.
So, as you are assessing which business to buy, figure out how much time you want to personally be investing in it, as there is a wide range from 5 hours a week to 50+ hours a week, depending on which business you end up buying.
Related: 8 Passive Income Ideas That Are Actually Worth Pursuing
5. You simply need a job
This last category is one of necessity. Sometimes people have a hard time getting hired for a job, and they need a salary with which to live. Oftentimes, their solution to that is buying a company that is large enough to afford them a salary or other annual distributions that can cover the costs of living. It may or may not involve having investor partners, depending on the size of the company.
But if you take on investors, just remember, you may be looking for another business to buy in 5-10 years, after your investors require you to sell the business to enable their exit down the road. If you don't want that risk, don't take on new investors.
So, as we have discussed, there are many different reasons for buying a business. Make sure you are 100% clear on the reasons you are buying a business, and incorporate the learnings above during your evaluation process, to prevent you from getting into a situation where you did not fully understand the consequences when you started. Good luck and happy hunting!
