At The Dealmaker’s Academy we are firm believers that the biggest wins in business often come from buying and selling a business. Acquisitions are simply one of the fastest ways to grow a business often at a rate you cannot achieve by solely working in the business. Perhaps you have reached the same conclusion and are ready to acquire a business. Maybe you have a business or two in mind but this raises a few questions.
How can you tell if the business you’re considering buying is solid? Will it be a worthwhile investment?
There are many marks of a strong business and in this guide, we highlight a few you should be looking for in your next investment.
A profitable business will often have the following traits:
High Profit Margin
One key indicator that a business could be profitable is high margins. Look for something close to or better than 60% of gross profit.
Another sign a profitable business will typically have is sizeable assets. Inventory, property, and stock are all examples of assets which hold value and could suggest the business has potential. For example, the company I bought for £1 had 80 unused Apple Macs, which we were able to sell off as a job lot for £40,000.
Substantial IP can be very valuable to a business. These could include trade secrets, copyrights, patented and unpatented products or technology or processes, use rights, licenses and so on.
Existing recurring revenues are also important. You need to know there is sufficient revenue to cover a variety of expenses including:
- Your £10,000 monthly management fee—or more if the company can afford it.
- Finance repayments.
- Any deferred payments to the seller
- Sufficient funds to cover operating expenditure (OpEx) and capital expenditure (CapEx).
Make sure the business has sufficient funds to cover its operating expenses (for example, salaries, rent, insurance, property tax, R&D, pension plan contributions and business travel). It should also have sufficient funds to cover necessary capital expenditure (such as hardware or vehicles).
Long-standing contracts and a history of sales are also good signs. However, it is important to be aware of the pitfalls fast growth in sales. This might require a substantial capital injection to finance growth.
High performing marketing controls will help you attract and convert a steady stream of leads for the business. Creating, testing and running marketing campaigns can require significant investments of time and money. Look for businesses which are already successfully utilising marketing controls for things such as sales letters and email sequences.
Streamlined And Systemised Processes
Systems which are not optimally streamlined can incur unnecessary costs and limit productivity. Worse still the absence of systems can leave a lot of potential and profitability untapped. It may be possible to introduce systems into businesses without them but this may be resource-intensive and require a lot of logistical work as well as money and time. When assessing a businesses profitability look for existing systems and processes.
Loyal, Trained And Qualified Staff
People are the lifeblood of any business. And loyal staff are especially so. Add to this to relevant skills and training and you drastically increase a business’ potential. If a business has a team of loyal and qualified staff this is a good sign and may indicate the businesses potential for generating profit.
There are many things which can lead to business success and maximise profitability. The list of traits to look for before a business acquisition. However this list of traits of profitable businesses has proven a great guideline. It illustrates some of the most common characteristics of profitable businesses. Bare them in mind when assessing the profitability of your next potential business.