1 – Select a Business

*Note: This page is generally only applicable to individual buyers.

In this section, we discuss the importance of acquiring a business that matches your interests and skills. We also offer tips on minimizing risks and facing the fear of making the leap.

Strategically Minimize Risk

Weigh the following criteria carefully to minimize your risk when selecting a business:

Passion

It’s ideal if you’re passionate about the industry in which the business operates. If you are, it’s more likely you’ll be willing to see it through when the going gets tough. Suppose you’re a former food scientist considering a business in the food processing industry versus one in logistics. If the food company hits a rough patch, your passion will more likely give you the confidence and buoyancy to persist. If, on the other hand, you have a knack for logistics, this might override an absence of passion and make for a wise investment.

Related Experience

If you possess related industry knowledge and skills, your learning curve will be shorter, which saves time and limits risk. But, your knowledge can become a handicap if you aren’t willing to delegate. You may find yourself micromanaging areas of the business that aren’t critical to its long-term success. Leverage your knowledge to provide the most value to the business you can, such as in sales or marketing, and be willing to delegate routine tasks that don’t directly contribute to future revenue and that can be easily performed by staff.

Relevant Skills

Some skills are transferable to other industries, while others are not. You can minimize risk by targeting a business in which you can leverage your existing skills instead of moving into an industry or business where you must acquire a new skill set altogether.

High-Value Skills

It’s also best to focus on performing tasks that are revenue-generating in your new business. Revenue-generating skills are in high demand and come with a high price tag – generally, they’re related to sales, marketing or networking. You’re more likely to be successful in a business where you have – and love performing – the skills that directly contribute to success.

Financial Cushion

It’s wise to maintain a moderate financial cushion in the event of a downturn. This includes both emergency funds and a strong debt-coverage ratio. A healthy debt-coverage ratio varies, but the wider the gap between the business’s monthly cash flow and your debt payments, the lower the risk and the more likely you’ll be able to weather unexpected events.

Balance Risk and Opportunity

Mitigating Risk

Your goal as a business owner should be to mitigate risk, not to completely eliminate it. If you prioritize security, you may sacrifice the freedom and opportunity that come with any form of risk. Being an entrepreneur is inherently risky – you must be prepared to accept uncertainty in any business in which you choose to invest.

First-Time vs. Experienced Owners

First-time business owners may be more averse to risk than experienced ones. Experienced entrepreneurs may be more accustomed to making decisions based on “gut feelings” or incomplete information. There’s no perfect business – as a business owner, you must learn to embrace both the opportunities and the risks.

Face Your Fears and Take Calculated Risks

Buying a business comes with an unavoidable degree of risk and, therefore, uncertainty. Some prospective buyers are willing to face their fears and make the leap despite this. Others become immobilized and are never able to take the plunge.

Face Fears Head-On

Fear is the biggest obstacle for would-be entrepreneurs. A successful entrepreneur must learn to deal with uncertainty and make judgments without knowing what the future may bring. Entrepreneurship is not about eliminating risk but rather learning how to face and manage it head-on, which includes learning to make decisions based on limited information.

The Search for the Perfect Business

At some point, the time and energy you spend searching for the “perfect” business or conducting due diligence will create diminishing returns. After all, the resources spent looking for the “perfect” business could be used to improve an “imperfect” one.

Lost Opportunity Cost

What’s the cost of delaying your decision by one year? If you become immobilized by your fears while searching for a business and hesitate to make decisions within a reasonable timeframe, you may struggle as an entrepreneur – not to mention risk losing the company that caught your eye in the first place.

Acquiring a Business is a Reversible Decision

Your decision to acquire a business is reversible, and you can sell a business later if you find it isn’t an ideal fit. If you maintain revenue and profitability, you’re unlikely to experience a loss when you sell. You could buy a business, run it, then sell for a profit in the same amount of time it takes another buyer to “watch the market” and “plan the perfect time to jump.” The knowledge and experience you acquire during this process can also allow you to proceed more intelligently the second time around.

Entrepreneurship is a Journey, not a Destination

Some attempt entrepreneurship and ultimately decide it’s not suitable for them, and that’s fair. Your entrepreneurial journey allows you to learn and grow, and the sooner you begin, the sooner you can decide if entrepreneurship is for you.

Discover Yourself

Becoming a successful entrepreneur isn’t solely about outcomes. It can also be about discovering who you are and who you’re capable of becoming. A major benefit of buying a business, even if you ultimately decide entrepreneurship isn’t for you, is that you won’t wonder what “might have been.” You took a chance, learned something valuable, and can choose to return to your previous career.

Learn from Leaders

Success is not final, failure is not fatal: it is the courage to continue that counts.

Winston Churchill

Learning from Experience

The biographies of successful entrepreneurs reveal a pattern. Often, they experience a winding, stop-and-go rollercoaster ride to success, filled with ups, downs, and everything in between. But the trajectory inevitably trends upwards over time. Think of it like the stock market’s performance over time – lots of peaks and valleys with an upward trend in the long run.

Learning from Mistakes

Entrepreneurs learn from their mistakes and become more savvy as a result. Their outcomes improve and they emerge as more successful entrepreneurs. This knowledge builds cumulatively until the entrepreneur reaches peak effectiveness, accomplishing goals with greater and greater ease. The key is to learn from your mistakes and start smarter and stronger after each miscalculation. Unfortunately, this judgment can only be learned the hard way – through experience. Computer scientist Jim Horning put it best: “Good judgment comes from experience. Experience comes from bad judgment.”

Learning from Leaders

The lives of some of the most successful entrepreneurs demonstrate the point. Reading biographies or autobiographies on successful business people such as those listed below can give you insights and inspiration. You’ll notice a common pattern on the road to success marked by unpredictable peaks and valleys. The road to success is never smooth.

• John D. Rockefeller – Dropped out of high school before becoming the world’s first billionaire
• Sam Walton – Founded Wal-Mart after losing the lease on his Ben Franklin store
• Warren Buffett – The world’s most successful investor’s holding company, Berkshire Hathaway, started out under Buffett’s ownership as a failing textile business
• Oprah Winfrey – Attributes her success to lessons learned from a traumatic early life
• Ray Kroc – Struggled as a milkshake machine salesman until hitting it big with McDonald’s in his early 50s
• Bill Gates – Says his failure to develop an Apple competitor, Android, cost Microsoft $400 billion
• Jack Welch – Went through numerous setbacks while growing GE from a $14 billion company in 1981 to a $410 billion company by 2000

“I’ve learned that mistakes can often be as good a teacher as success.”

Jack Welch