Lesson #1

Welcome to lesson #1 of “Learn How To Buy A Cash-Flowing Business In 5 Days.”

My name is Helen Guo, and after exiting my last business that I started and grew to over $30M+ in 3 years, I’m now buying cash-flowing businesses and helping others do the same.

I believe that business acquisition is the biggest opportunity in entrepreneurship and investing today for 2 reasons:

1. Most startups fail because they never find product-market fit. When you buy an established business, you skip the startup phase altogether. You inherit customers, a proven product/service, a team, and can step into cash-flow from day 1.

2. The largest generational transfer of wealth in history is taking place with baby boomers who are retiring and selling their assets. The Small Business Administration (SBA) estimates that around 10 million baby boomer-owned businesses will change hands between 2019 and 2029.

I also believe there’s enough opportunity for everyone, which is why I’m sharing everything I learn along my journey.

In the next 5 days, my goal is to help you demystify the business buying process.

So let’s get started!

In today’s lesson, we'll start with an overview of the business acquisition process and show you how to come up with your search criteria. 

In my experience, the business acquisition process can be broken down into 10 steps.

Step 1: Identify your search criteria. 

Make an informed decision about what type(s) of businesses you’re looking to buy, size of business, location, etc. We’ll cover this in more depth a little later in this email. 

Step 2: Source deals. 

There are many avenues to find businesses for sale. Two of the most common ways are to find businesses for sale listed by brokers or marketplaces or cold outreach to businesses in your search criteria. We’ll cover this in more depth in the next lesson.

Step 3: Conduct seller meetings to vet a business. 

This is my favorite part. The best way to learn more about a business is to talk to the seller and ask the right questions. This is also the time to present yourself, your track record, and your unique skillset. Remember, buying a business is as much about how much conviction you have in a business as how much faith a seller has in your ability to close a deal and continue operating the business to preserve the seller’s legacy.

Step 4: Structure the deal 

Determine how much a business is worth to you. If you’re getting a loan from a bank, you’ll need to make sure the business’s cash flows can support servicing the debt needed to pay back the bank as well as what you’ll need to be comfortable living off of. You’ll also need to determine how much you will pay the seller upfront versus at a later date. The goal here is to align valuation expectations for both parties while derisking the deal as much as possible for you as the buyer. We’ll cover this in more depth in lesson #4.

Step 5: Submit a Letter of Intent (LOI). 

Once you come up with a deal structure, put forth your official offer to the seller (in legalese). You may need to go back and forth until there is an agreement between both parties. Bookmark my LOI template »

Step 6: Conduct due diligence 

This is the part where you verify the numbers that the seller has shared. You’ll want to do things like validate their historical bank statements and tax returns and confirm sales by customer. We’ll cover this more in-depth in the 4th lesson.

Step 7: Secure the financing

Present yourself and the opportunity to SBA lenders who regularly finance these types of acquisitions with very little money down required from you, as well as any other investors you may want to bring on board to further bring down the cash you need to put into the deal. 

Step 8: Prepare the docs

Once you feel comfortable with your findings during due diligence, you’ll want to work with a lawyer to prepare legal documents such as the purchase agreement and employee agreements.

Step 9: Close the deal 

Once a deal passes the lender’s underwriting process, you’ll have to work through the final paperwork, all the legal documents signed between you and the seller, and release payment to the seller. 

Step 10: Begin the transition

Now begins the fun part! Transfer all credentials, trademarks, etc. under your new entity’s name, and start working with the seller to learn the ins and outs of the business.

Now, how do you come up with your search criteria?

First, there are what I call “universal truths” when it comes to business buying. These are things I always like to look for in a business (and things I avoid like the plague).

1. Demand for the business/industry should be growing faster than inflation. For example, you may want to avoid buying a business that specializes in coffins since cremation rate is on the rise.

2. The longer the business has been around for, the better. It means the business has survived booms and busts, is more likely to have a strong reputation, as well as long-standing customers. 

3. The business comes with recurring or repeat revenue. Contracts are even better.

4. The clients stick around. This speaks to the quality of the product/service. Remember, when you buy a business, you’re buying its existing customers.

5. The business is not severely affected by the macroeconomic environment. For example, you’d likely want to avoid a business focused on new home construction.

6. A unique advantage. Perhaps it’s the contracts I mentioned earlier. Or, perhaps a business has no competition within a 50 mile radius. Or there are hard-to-obtain licenses. 

7. Strong margins. I look for over 10% net profit margins at the minimum. Over 20% is great. 

8. The business will still exist in 20 years. For example, you might want to avoid buying a customer support center since that entire industry is quickly getting taken over by AI.

9. The owner is selling for the right reasons. My favorite is retirement. 

Then, some “unique-to-you” factors will impact your criteria:

1. Is there a specific geography you need to be in?

Or perhaps, you would like to travel the world and run a business remotely.

2. What’s your “special sauce?” 

Is there an industry you have domain expertise in? Do you have a unique skillset to bring to the table? Perhaps you are a digital marketing whiz or have experience with B2B sales

3. How much money can you invest?

As a rule of thumb, an SBA lender will usually require you to put in 10% down. This can be lower or higher depending on factors such as how much the seller is willing to offer financing and your personal background.

4. Do you want to run the business?

If you want to hire someone to run the business, you’ll need to make sure the business is big enough so the cash flows of the business can support additional hires.

With these criteria in mind, you’ll want to come up with an initial list of industries you want to focus on. 

Don’t worry about keeping it broad initially. As you start looking at opportunities, you’ll further narrow down your search criteria.

Well done! You’ve made it through lesson #1. 

Keep an eye on your inbox tomorrow for lesson #2 (or if you want to dive into lesson #2 right away, click here).

We’ll discuss where you can find the best opportunities, including strategies to find both on-market and off-market deals.

See you tomorrow!

-Helen Guo
Connect with me on Twitter/X or LinkedIn

P.S. Every Tuesday and Thursday I share the top 5 latest businesses for sale that I come across along with my breakdowns. Be on the lookout for these emails as it’s a great opportunity to learn how to buy a business from real-life examples. If you want to read the most recent editions, click here.

P.P.S. Want me to help you find a business to buy in the next 90 days and handhold you through closing your first deal? Book a call.