How to Know If a Business Is Worth Buying (3 Filters)
The filters that separate assets from expensive jobs.
Owners and Others
The cold hard fact of life is that there are owners and there are others. There are people who own, create, or sell things. Then there’s people who work in them.
Individuals who work inside of businesses but possess an ownership mindset work their way to top and run the show. If you read this today and say, “business ownership just isn’t for me,” I would highly encourage you to work on your ownership mindset.
In ten years, and I hope I’m wrong about this, the only people left employed with meaningful income will be those who own the business and the person running it with an ownership mindset. The exception to this being those working in trades which will be discussed today.
You must take ownership of your situation, right now. There has never been a better time in human history to be in the driver’s seat of life with every single tool and resource at your disposal.
Tired of working that job you hate? Starting at the bottom with big goals to make it to the top? The solution is ownership. You can either own a business, or you can have the ownership mindset.
I’m going to try and not spill my coffee as I jump down from my soap box.
In this post, those that are interested in business ownership are going to learn the three filters to know if a business is worth buying.
After all, nobody wants to buy another job that they hate and costs them money.
Recession-Resistant
The first thing to ask yourself when looking to buy a business is the following question, “Is this business recession proof?” The second important question to ask is, “How will this business be affected by AI?”
Notice how I said how will, not will this business be affected by AI. We are all going to be affected by AI, period.
“Dread it, run from it, destiny arrives all the same.” - Thanos
The industries least likely to get affected, they will more than likely grow, by AI are the trades. Plumbing, electrical work, welding, you name it. These are also extremely recession proof businesses.
Essential services like pest control and waste, cybersecurity, healthcare, and financial are also very recession proof industries. Healthcare and financial services definitely have risk with AI attached to them but it’s mainly for those below the ownership level.
I’ve been dead broke and had a guy come spray for spiders. Someone could be living in their own little AI world on their phone but the second a spider lands on their shirt, they will call the pest control company.
Another exercise I would highly recommend before buying a business is asking ChatGPT, Gemini, etc. how they could wipe you out if you purchased a certain business. Chat is a yes man, so you’ll have to press to get the truth.
If you do not ask that question, the other guy in town who will be your competition is going to ask the same AI model how they can wipe you out. If you know how many bullets are in the chamber ahead of time, you can have a plan to disarm them.
Even better, you’ll find a way to get those bullets in your gun.
They are going to add another bankruptcy chapter in the AI era: Chapter FAFO.
Don’t Buy a Job - Buy Profit
Anyone who does not own a business romanticizes the idea of it. All the money they will make, having a big brand, launching a new product or service.
Here’s the truth, businesses are dirty and hard. People don’t actually just walk in and do business because they saw your sign on the side of the road. They’ll share a post on Facebook saying shop local right before they place an order from Amazon.
Knowing that no matter what business you buy will be challenging, you want to make it easier on yourself in the beginning. The good news is there’s only one thing you need to look for to get a headstart.
The one thing that matters, profit. You want to buy a business profitable enough to pay yourself for all the effort and sacrifice. Taking it further, you want a business that’s established and profitable enough that it retains and pays the people who will help run it.
If you do not do this, you will feel like you just took out a loan or sunk your life savings into a job that’s way more stressful than your previous 9 to 5.
To make matters worse, it gets terrifying if you buy a business and take financial risk with zero evidence that it will earn enough to pay you or the bank back.
Make this your order of priority when evaluating the profit of a business:
The existing profit covers debt costs or a return on your investment.
The existing profit will pay for employees to run the business.
The existing profit will pay you for your effort and sacrifice.
Your compensation comes last because if you do this right, you will own an asset that pays for itself. The worst-case scenario is you maintain your job until the business has grown enough to cover all three.
Ignore revenue, focus on the profit.
Room to Optimize
Want to accumulate wealth? Focus on buying a valuable business.
If you want to expedite the rate at which you accumulate wealth, focus on owning a valuable business and making it even more valuable than it is today.
Once you’ve found a recession proof business with profit, now you have to lift the hood of the car. Is this business firing on all cylinders?
Last year we had centipedes, it was time to call pest control. I called a local place and they came out promptly. There was only one problem, and it wasn’t mine.
The technician came out with a clipboard, wrote me a paper invoice (after performing the service), and asked if I had a check. I asked if he could take a card which he could not. He gave me the address to their office for me to go pay in person by card, they didn’t have a billing link.
I walked into their office with wood paneling and the first thing I saw was a fax machine. The receptionist had to manually type my card into their computer system. You most likely think I’m being dramatic and making this story up, but every single detail is true.
Businesses like the one I’m describing are gold mine opportunities. They have been around for over 50 years, and they still operate like it. That means they have tons of inbound traffic, brand credibility, and profit.
When you start the discovery process of finding a business, observe your surroundings. Do they have a clear sales process? Are they up to date on technology? How do they process billing? How do their prices compare to others in the area?
The goal is to not reinvent the business, after all they made it 50 years for a reason. However, optimizing and bringing that great brand into the 21st century unlocks unlimited possibilities.
Imagine had the technician been coached to respond to me, “I sure can, it’s $150 for a card today or if you bring a check by our office, we will discount it to $100.” I would have paid $150. The $100 price, if I cheap out, is what the original price was going to be anyway.
A 50% increase in profit just optimizing one area of the business. These opportunities exist everywhere.
An increase in profit will directly increase the value of the business. Finding a business that can be optimized is the fastest way to double your net worth in less than twelve months.
The One Question That Matters Most
After filtering the business in all three areas, you have to ask yourself one question.
“Am I willing to walk away from this opportunity?”
The correct answer is the opposite of what you would expect, you have to be able and willing to walk away. The inability to do so makes you emotional and vulnerable.
You’ll get negotiated into a higher price, bad terms, or terrible financing. You’ll allow them to skip steps or not provide you certain pieces of information.
Being willing to walk away does not mean you are not going to fight hard for the deal. What it does mean is that you’re willing to draw a line in the sand for the protection of yourself and others.
Buying a business is high stakes. You have to know when to hold, know when to fold, and know when to walk away.
My Favorite Drink
Someone asked me the other day what my favorite drink is when I’m cutting loose. Grace and I get one or two coffee dates a year to ourselves these days.
My favorite drink order, when I’m not drinking a drip coffee, is a honey latte. If I’m feeling extra crazy, I’ll add some cinnamon to it.
Ironically my cutting loose drink is the same as my sore throat drink, it’s an absolute must have when you’re feeling under the weather.
Send me a message and tell me what your favorite drink is and from where!
As always, cheers.