A growing number of entrepreneurs are turning profits by acquiring, rehabbing and selling small businesses. While it can be very lucrative, this practice does come with plenty of risk. If you'd like to successfully flip an existing enterprise, here's what you should look for.
Consider the industry. To successfully flip a business, you will need buyers. You will also need enough competition among buyers to drive your asking price up. With this in mind, it's very important to target businesses within industries that are experiencing exit growth. Whether it's travel, health and wellness or data storage, you want to consider the industry as much as the business itself. Do your research, so you won't end up stifled by a lack of interest down the line.
Look for good value. “Buy low, sell high” might seem like a tired cliché; however, it is extremely relevant for entrepreneurs who flip small businesses. To generate worthwhile margins, you need to be familiar with the market, so you can jump on fleeting opportunities priced below market value.
Prioritize cash flow. Instead of focusing on companies with a large amount of assets, look for ones that generate cash flow. When flipping, you generally want to avoid depreciation.
Look for survivors. Some businesses just keep surviving, despite poor presentation, bad customer service and general disarray. If you can identify one of these, you may be able to quickly improve its trajectory by adding your experience and expertise to the mix.
Watch for bad marketing. Weak marketing is a good sign, especially if the business is still turning a profit. This is because it's relatively easy to implement a better marketing plan that allows you to track, test and measure your customer interactions.
Avoid big barriers. Time is a huge factor for entrepreneurs who flip small businesses. If a company involves long sales cycles, specialized skills, highly technical training or a lot of owner involvement, it's going to be more difficult to flip. Ideally, you want to be able to easily identify why a company is under-performing and efficiently optimize it as soon as possible.
Seek a big upside. Analyze the numbers to get an idea of how much a business could bring in if you are able to get it running at a higher capacity. Is that number $15,000 a month or $2,500? The higher the number, the easier it will be to find a motivated buyer when the time comes.
Check your emotions. When weighing candidate businesses, it's important to view them objectively. Avoid falling in love with an enterprise and consider the realities. Determine why the owner wants to sell. Is the business owner simply tired of running the business, or has the person correctly determined limited growth potential. Separate your emotions from the opportunity, and view the enterprise as a temporary asset instead of "your new business."