Finding the right business to buy can sometimes be a long process. Searching for an investment in the right location, at the right price, and which fits all the criteria you’re looking for isn’t always easy - especially when you consider there are more than 56,000 listings here on BusinessesForSale.com.
But there are sure to be some ‘hidden gems’ out there. Maybe they’re businesses with huge potential for growth that might not be immediately apparent at first glance. Perhaps they’re selling at a reduced price due to a retiring owner, or other personal reasons.
For this article, we spoke to business brokers working across the international spectrum and asked them – what makes a business a ‘hidden gem’? And how exactly can buyers ask the right questions to go about finding them?
Tip: if you're looking for a unique or overlooked business to buy - take a look at our new 'Hidden Gems' category.
Subscriptions, partnerships and property
Matthew Trinder, a UK broker who is Managing Director of Sovereign Business Transfer, says businesses which operate on a subscription model are often hidden gems. “Any business with steadily recurring income that can generate continuous cashflow will be a good investment,” he says. That could mean B2C subscription services to things like food boxes, as well as IT, financial services, or even dental practices.
Another thing Trinder says buyers should always ask early in the process of investigating a business is why the owner has decided to sell. “It isn’t easy to filter for this, but if you can find a business that is selling for personal reasons, you’re much more likely to get a good deal on it,” he says. “That might mean the owner has split from their business partner, is retiring, or has just decided they want a change of direction – in all three cases they’ll be looking to sell the business quickly.”
Lastly, Trinder says that businesses which are freehold as opposed to leasehold – meaning you own the land the business sits on indefinitely rather than for a set period of time – are heavily favored by banks. “Banks love property,” says Trinder. “So you’re much more likely to get finance to help you buy a business that is a freehold. In general, they’re less sure of the value for leasehold businesses, so they’ll be looking for security, personal guarantees and higher deposits.” Finding a business which is a freehold but still affordable could be a way in to finding a hidden gem, then.
Emerging markets, digital businesses and risk
Maurice Muise, an experienced Canadian business broker who is President and CEO of Muise Mergers & Acquisitions Inc, says that buyers should keep an eye out for businesses that operate in growing markets. He gives the example of cafes and restaurants which have a strong gluten free or vegan offering: “They might not shout about it when they’re selling the business, but if they’re catering effectively to a specialised market like this, that can have big potential for growth under a new owner.”
Muise also points towards online businesses as potential treasure troves for ‘hidden gems’. Buying a website might not be the first thing that comes to mind for entrepreneurs looking to invest in a business, since it doesn’t come with any of the staff, premises or day to day management. But website traffic can lay the foundation for a much larger enterprise, and investing in a successful, growing digital business could reap unexpected rewards.
Lastly, Muise says buyers should keep an eye on the level of risk associated with any business they’re investigating. “They should really drill down into any operational or financial risks associated with the business, and that can be used as leverage to reduce the asking price in some situations,” he says. In this way buyers could make a business a ‘hidden gem’ for themselves.
Word-of-mouth marketing
Another green flag buyers should be on the hunt for is strong word-of-mouth marketing. Party Bag World, the subject of a recent BusinessesForSale.com success story, is a great example of this. Husband and wife duo Kerry and Jason Craddock created a business which sold customized party bags – initially just to children’s parties, but branching out to other kinds of events as they gained more and more customers.
Party Bag World had a savvy, self-perpetuating marketing model. The party bags were full of surprising toys and treats which the children were excited to show off to their parents when they came home from a friend’s party, and those parents then became customers themselves. “We spent very little on marketing, and had hardly any presence on social media,” says Kerry. “People found us – one day we got a phone call from McDonald’s after one of the kids must have had a birthday party there. They put in an order for thousands – it was quite surreal!”
While not every business can work with this kind of marketing, there will be some hidden gems out there which can. Buyers should keep an eye out for businesses which offer something unique and surprising which their customers will be excited to recommend. It could help keep marketing costs low, and give you a stable base of repeat customers.
What makes a business a ‘hidden gem’?
In summary, there are a few things buyers should keep an eye out for when looking a business to invest in. Businesses with subscription models can generate continuous cashflow, while freehold businesses are looked on favorably by banks.
Companies which are being sold for personal reasons, or which come with higher levels of risk, might be ones you can get for a lower asking price. Those which operate in emerging markets, as well as digital businesses, can also have huge potential for growth that might not be immediately obvious.
Lastly, business which operate with strong word-of-mouth marketing can help costs down and generate new customers at a consistent rate. While you’re unlikely to find a business that ticks all of the above boxes – it’s worth keeping some of these questions in mind while you search for the perfect investment.