What to Look for When Buying a Business to Flip
You may be familiar with the term “flipping a house” because of the boom in the Australian property market and the increase in real estate developments that has gone on around the world. When an investor flips something, they make an initial investment, do some work to improve the ‘investment’ and then sell it for a profit.
Along with real estate, it is also popular to flip:
- Industrial equipment;
If you want to make a quick profit by buying a business to flip, then you need to know what to look for before investing your money. And even if your flipping plans are long-term, you still need to have all of your elements in place if you want to generate a profit when you finally do advertise the business for sale.
When you flip a business, it is important to get involved in a company that will require as little work as possible on your part.
It’s impossible to be successful at flipping businesses if you do not have your financing in place.
Your financing will cover:
- Initial investment costs;
- Funding required to improve the business;
- Holding costs (if there are any).
When you flip a home, your holding costs are made up of the monthly utilities, mortgage payments, insurance fees and taxes. When you flip a business, you hope that the revenue generated by ongoing operations will eliminate the need for holding financing.
But if you make changes to a business that causes revenue to drop, then you will need to bring in your own financing to keep the business going until you can make it profitable again.
In the business flipping world, holding costs are not common, but you should still have financing in place as a contingency plan.
What Type Of Business Should You Flip?
Business flipping is usually a long-term process that can take months or years to complete. That means that trying to flip businesses that are popular for a short period of time is not a good business model. Your goal is to take a business that can show long-term profitability, buy it for a low price and then sell it for a profit.
The industry you work in will depend on your area of expertise. You should avoid buying businesses that are in industries you are unfamiliar with.
The ideal business to flip is a business that is under-performing for reasons you can identify. For example, if you see a solar energy installation company that is struggling to make money because it lacks marketing ability and the right network of vendors, then that could be a business you flip.
It is a business that is in a popular industry, and it has problems you can identify and fix.
Another good business to buy is a business that has poor management, but manages to continually generate a profit. If you can buy a business like this at a reasonable rate and implement a successful business plan, then you can make a profit on your business flip.
What Types Of Businesses Should You Avoid?
The most difficult types of businesses to fix are those businesses that are based on bad ideas. A retail business that has a poor concept or a business-to-business sales company in a market that is already saturated with quality players are bad businesses to invest in.
If it looks like it would be better to close a company than repair it, then that is not a company you want to try and flip.
Buy Based On Potential
One of the fastest ways to lose money flipping businesses is to follow your heart instead of your head. If you are considering flipping a business that has all of the classic symptoms of being a bad investment, then walk away.
Too many business flippers feel that they can turn a business around because they become infatuated with the business’ concept, or they have always wanted to run a business in a particular industry.
Use facts and figures to dictate your business flipping decisions, and leave your emotions and ego out of it.
Buying A Name
When you get very advanced in your business flipping skills, you will sometimes come across a situation where the name of a business offers more value than the business itself. For example, a company may have spend decades establishing a solid reputation and building a loyal customer base, but the newest owners are destroying the business through mismanagement. The business itself is in trouble, but the name is still popular.
In this case, you can make an arrangement to purchase the business at a cut-rate price and then sell the name and the business marketing images to someone who feels they can bring the old business to life. These are not common business flipping transactions, but they are out there if you are looking.
Have A System And Stick To It
As you gain more experience in flipping businesses, you will develop a system for finding and flipping companies to make a profit. Your system will be built over years of trial and error, and the mistakes you make will wind up being valuable lessons.
Once you have developed your system for flipping businesses, you should always use and refine that system to keep making money. As your reputation for flipping businesses grows, you will be faced with offers and suggestions from everyone you know, and a lot of people you don’t know. Never question your own success when you flip businesses. Stick to your system, and keep making money.
Establish A Positive Reputation
Flipping businesses is a lot like flipping houses in that many of your best leads come from referrals. If you become a ruthless business flipper, then those referrals are going to be hard to come by. When you flip businesses, use ethical business practices and develop a positive reputation that will help the referrals to keep coming your way.
Business flipping can be extremely profitable, but it can also take a long time to buy and flip a company successfully.
If you are patient and know what to look for, then you can make a good living turning failed businesses around and selling them to new owners.
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