This is part-two of my FIVE-part process for generating a significant amount of wealth via acquiring a business without spending any of your own money, growing and improving it quickly before selling it on and generating a big profit. Yesterday, I introduced you to the concept of this five-part process. If you missed this post, read it first here.
Onto part-two. Finding the right business, with the right fundamentals in place, is the key to ultimately reaping huge rewards. Here are 10 essential elements that should be present within a business before you even consider making a deal, even if you are not parting with any of your own cash.
1 – The business can survive despite itself. In other words, although the business may be stagnant or struggling to grow, it should be able to at least sustain itself in the medium-term. It should be fundamentally resilient, with solid systems in place, even if it is not as efficient as it could be. Having confidence in the foundations of the business will give you the freedom to make efficiency gains, improve systems and structure within the company, and to get it on a pathway to growth.
2 – It’s a cash flow business. You don’t want to risk taking over a business that relies on a few big clients with a few big orders. You also don’t want be stuck with a lot of fixed assets lying idle. Often with a change of ownership, clients will start to think about using other suppliers. Since their relationship with the previous owner has ended, they see this time as an opportunity to look at their options, and so may cancel their orders, leaving you desperately trying to find another big client instead of focusing on improving the business infrastructure. A steady cash flow ensures stability and allows you to concentrate on the important stuff.
3 – It provides a consumer staple product or service. A staple is something that everyone needs, even during economic downturns – basic food items, haircuts, alcohol, clothing etc. A business dealing with staples lowers your risk while still giving you plenty of room for growth. You also want a business that employs workers with a low skill base, so you are never struggling to find the right people. You want a business with limited service or sales interaction, where customers just walk in and walk out on a regular basis – the simpler, the better.
4 – It has terrible or no sales and marketing expertise. Often, an owner/manager will be stuck in their ways, having perhaps started the business from scratch and run it for years. They may think they know how best to run their own business, and don’t need to worry about fancy marketing concepts. Cash flow businesses thrive on word-of-mouth and repeat customers. There are sometimes fantastic opportunities to increase sales and revenue in a business just by employing smart and cost-effective marketing strategies.
5 – A competent manager is in charge. You need someone capable to work in the business while you work on it. You need to be able to trust your manager to keep the business running smoothly in your absence. If the business does not already have a good manager in place, make sure you find one to do the job, even if this means giving up some equity. You do not want to be concerned with the day-to-day stresses of running a business while trying to build it up.
6 – There is potential upside that can be realised quickly. I look for a minimum of $10K profit growth per month within the first 3 months. Often the owners can’t see the wood for the trees. They may have been working in the business for too long, stuck in their “tried and true” ways, and so miss possible opportunities for growth. Sometimes it takes someone from outside to see new possibilities. You need to be able to identify areas within the business where fast and smart changes can be made that drive profits.
7 – It’s a bargain. The business you acquire will be either completely free, where you just take over the lease, or it’s paid for from vendor finance and deferred payments. It shouldn’t cost you one dollar of your own money. You must be able to take cash out of the business for yourself, on day one of the handover. This can be done by leveraging the balance sheet. It’s about being creative, and making the financial structure of the business work for you.
8 – The owner is desperate to get out of the business. Perhaps there is a tired and frustrated owner/manager in charge that just wants to quit and move on to enjoy retirement or a new challenge. Maybe a portfolio investor needs to cut ties with the business to focus on new opportunities. Or the business may be owned by a large corporate that is looking to shed its non-core assets. Basically, you are looking for an owner who will be grateful to you for taking the business off their hands, and you would be surprised how many there are.
9 – The seller values legacy more than cash. Even though the owner may be keen to get rid of their business, they may feel a deep connection to it. After all, they may have started this business themselves and worked hard to make it a success, investing their time, energy and emotions into it over many years. It can be very important to them that their baby continues to thrive, long after they are gone. If you can convince the seller that your goal is to build on their hard-earned reputation and brand, and to grow the business and make it stronger, then that may mean a lot more to them at the end of the day than a bit of cash.
10 – The business has enough working capital to survive for at least 6 months. You don’t want the stress and anxiety of not knowing if the business will go under while you are making positive changes. Analyse the balance sheet and ensure there is sufficient working capital to keep things ticking along while new systems and strategies are put in place.
If you follow these 10 simple rules for acquiring a business, you will ensure that you maximise your chances to reap amazing profits and gain enormous success in the future.
In part-three, we will continue with this five-part series and explore my unique 10-step system for originating hundreds of opportunities, filtering them and negotiating cash free deals with the opportunities closely mapped to your expertise and passion.