The Best Opportunity to Buy!

What kind of buyer are you? Matching your skills to the needs of the business is important to ensuring the future success of the business. Although there are many ways to classify a business, one way I like to look at a business is through the perspective of cash flow. Understanding the skills of a buyer to manage cash flow becomes critical when matching that buyer to an acquisition.

When it comes to describing a business by cash flow, it is useful to compare the cash flow relative to sales respective to the industry average. In this manner one can determine if the acquisition is a good, better or best opportunity. Although these terms are rather trivial, the skills needed by an owner in each of these situations can be quite different.

In a ‘good’ opportunity the business is usually performing below industry expectations. Why is this good? A skilled turn-around buyer looks for good opportunities as they provide the best improvement potential at the lowest acquisition price. Using their turn-around skills a new owner can work to gain the benefits of higher cash flow from raising a good business (less than industry expectations) to a better business (meeting industry expectations).

A ‘better’ opportunity is a business that is meeting industry expectations and has opportunity for growth. Leveraging growth on existing overhead and relative capital increases the net profit margin, i.e. cash flow. A buyer skilled in increasing growth can take a better business and manage it into a best business by growing sales. A skill that is not trivial as it sounds.  Whether a buyer is ultimately looking for the additional cash flow that comes from growth, or the increased multiple that comes from reselling a best business, the gain can be significant.

In a ‘best’ opportunity a business is already producing cash flow above industry expectations. The previous and/or current owners have improved the business and managed growth to provide a higher margin on revenue than other businesses in their industry typically earn. A best business has the strongest options for financing, and support the debt structure while providing the buyer with a good earned income stream. In a best business a buyer can look to continue managing the business in its current state of performance (earning solid income), seek new growth opportunities, or leverage the “process” through replication into new markets.

Whatever opportunity you seek as a buyer, the success or failure of a business, as Marcus Lemonis continuously highlights on his reality show “The Profit”, can be broken down into three components – People, Product and Process. Ignore any one of these three and you can have something less than a ‘best’ business.