10 Smart Criteria for Choosing the Right Industry to Buy a Business

One of the most common questions aspiring business buyers ask is simple: What kind of business should I buy?

The answer isn't a specific industry—it's understanding the criteria that make an industry attractive in the first place. By evaluating opportunities through the right lens, buyers can dramatically improve their chances of long-term success.

1. Industry Knowledge and Access to Information

The more you understand an industry, the better positioned you'll be to evaluate opportunities and identify risks.

If you're entering a new industry, look for one with abundant resources, training materials, and publicly available information.

2. Plenty of Independent Operators

Industries with many independently owned businesses provide more acquisition opportunities.

A larger pool of potential sellers means more choices, better negotiating leverage, and a higher chance of finding the right fit.

3. Resistance to E-Commerce Competition

Some businesses can easily be disrupted by online competitors. Others require local presence, customization, or hands-on service.

Industries that depend on local relationships often provide stronger long-term protection.

4. Opportunities for Improvement

Look for industries where better systems, technology, or operational efficiencies can create value.

However, improvements should be based on a solid understanding of the business—not assumptions about how things should work.

5. Stable or Growing Demand

Strong industries typically have consistent demand over time.

Consider both short-term market trends and long-term demographic changes that could influence future growth.

6. Meaningful Barriers to Entry

Licensing requirements, technical expertise, certifications, and regulations can help protect existing businesses from new competitors.

These barriers often make established businesses more valuable.

7. Healthy Profit Margins and Cash Flow

Industries with strong margins provide more flexibility and often require less working capital to support growth.

Predictable cash flow is especially important for business buyers who may have acquisition debt to service.

8. Scalability and Growth Potential

Some industries offer opportunities to expand geographically, add locations, acquire competitors, or increase service offerings.

Growth potential can significantly increase future business value.

9. Manageable Regulatory Requirements

Regulation can be a competitive advantage—but excessive compliance burdens can create unnecessary complexity.

Look for industries where regulations provide protection without becoming overwhelming.

10. Personal Interest and Lifestyle Fit

The best business on paper may still be the wrong business for you.

Consider whether the industry aligns with your interests, strengths, lifestyle goals, and the type of work you want to do every day.

If you want to learn more about creative private investments, check out my book Invest Local — available on Amazon or as a PDF from DCBBooklist.com

If you're interested in learning more about buying businesses, check out Buying Vs. Starting a Small Business: Searcher Startup and other recommended resources at DCBBooklist.com.

Key Takeaways

Choosing the right industry is often more important than choosing the right business. Buyers who evaluate industries based on demand, profitability, scalability, competition, and personal fit will make smarter acquisition decisions.

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SBA Loans Explained How to Buy a Business With Little Money Down with Lisa Forrest

In this 'best-of' interview, I sit down with Lisa Forrest of Live Oak Bank, one of the most experienced SBA lending experts in the industry. We discuss how SBA loans work for business acquisitions, what lenders look for in borrowers, common financing mistakes, working capital requirements, seller financing, debt service coverage, and much more.

Original Livestream video: https://youtube.com/live/xfT0nddhzEE

The Biggest Lie in Business Buying: “Just Hire a Manager”

 

**New Video Alert!

Spend a few minutes on social media and you'll hear it: "Just buy a business and hire a manager."

It sounds simple.

But the reality of business ownership is very different.

In this video, I explain why managers still need supervision, why owners carry responsibilities that can't be delegated away, and why this popular advice often creates unrealistic expectations for first-time buyers.

Watch the video here: https://youtu.be/71lmcZGNrks 

Cheers

See you over on YouTube

David C Barnett

Why Banks Love Seller Financing in Business Acquisitions

Many buyers see seller financing as a way to bridge a funding gap. But what many people don't realize is that banks often value seller financing just as much as buyers do.

In fact, a seller note can significantly improve a lender’s confidence in a business acquisition.

Seller Financing Reduces Risk for Banks

When a seller agrees to finance part of the purchase price, they remain financially invested in the success of the business.

From a bank's perspective, this creates an important layer of protection.

The seller:

• Knows the business better than anyone

• Has confidence in its future performance

• Has a financial incentive to help the buyer succeed

That alignment reduces risk for everyone involved.

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Why Banks Sometimes Delay Seller Note Payments

In some transactions, banks require seller note payments to be postponed for a period of time.

Why?

Because every dollar that stays in the business improves cash flow and increases the chances that the bank loan will be repaid.

The lender wants to see:

• Stable operations

• Consistent cash flow

• A successful transition to new ownership

Before additional money starts flowing to the seller.

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Sellers Become a Safety Net

Banks also recognize that sellers have a unique advantage: they understand the business.

If a buyer struggles after closing, the seller may be in the best position to:

• Offer guidance

• Assist with operations

• Step back into the business if necessary

This ongoing involvement can help protect the lender’s investment.

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Government-Backed Loans Change the Equation

In markets with government-guaranteed lending programs, banks often take a different approach.

Because part of the risk is transferred to the government, lenders may place less emphasis on large seller notes.

This can lead to:

• Easier access to financing

• Smaller seller financing requirements

• Higher business valuations

While helpful for sellers, it can sometimes increase risk for buyers.

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Why Buyers Should Still Want Seller Financing

Even when bank financing is available, buyers benefit from having a meaningful seller note in the deal.

A substantial seller note:

• Aligns interests

• Encourages transparency

• Creates accountability

• Provides additional protection if issues arise after closing

For many experienced buyers, seller financing remains one of the most important risk-management tools available.

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If you want to learn more about creative private investments, check out my book Invest Local — available on Amazon or as a PDF from DCBBooklist.com

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Key Takeaways

Banks value seller financing because it reduces risk and keeps sellers invested in the future success of the business. A meaningful seller note aligns incentives, supports smoother transitions, and adds an extra layer of protection for both lenders and buyers.

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👉 Want deeper dives like this? Join my email list at DavidCBarnettList.com for early access to videos, insights, and 7 free bonus gifts.

The Most Expensive Mistake Business Buyers Make

 

**New Video Alert!

Many people think they understand business cash flow.

Then they buy a business and discover they forgot one critical expense.

Depreciation.

In this video, I explain why depreciation and capital expenditures are some of the most important concepts in business acquisition, and why ignoring them can lead to disappointing returns and expensive surprises.

Watch the video here: https://youtu.be/x9qkUhcqzmo 

Cheers

See you over on YouTube

David C Barnett

Royalty Financing in Business Acquisitions: A Creative Alternative to Traditional Deal Structures

 

When buyers and sellers disagree on what a business is worth, traditional financing structures don’t always work.

That’s where royalty financing can become a powerful solution.

Rather than agreeing on a fixed purchase price, royalty financing allows part of the seller’s compensation to be tied directly to the future performance of the business.

What Is Royalty Financing?

Royalty financing is an arrangement where the seller receives ongoing payments based on future business results.

These payments are often tied to:

• Revenue

• Units sold

• Growth targets

• Other performance metrics

Instead of paying everything upfront, the buyer shares a portion of future success with the seller.

Why Buyers and Sellers Use Royalties

Royalty structures are most useful when there is uncertainty about future performance.

For example:

• The seller believes the business is positioned for rapid growth.

• The buyer believes that growth is unproven.

Rather than arguing over valuation, both parties can let future results determine part of the final payout.

How Royalty Deals Work in Practice

A common structure involves:

• An upfront payment for tangible assets and current value

• Additional royalty payments if performance targets are achieved

This allows the buyer to avoid overpaying today while giving the seller an opportunity to benefit if their predictions prove accurate.

The result is often a more balanced and flexible transaction.

The Benefits of Royalty Financing

For buyers:

• Reduces upfront risk

• Aligns payments with actual performance

• Helps bridge valuation gaps

For sellers:

• Creates upside potential

• Rewards future growth

• Keeps them invested in the business’s success

Both sides gain a mechanism for sharing risk.

Potential Challenges

Royalty financing isn't suitable for every deal.

Some lenders may be reluctant to finance transactions with variable payment structures because future obligations are harder to model and predict.

As a result, royalty agreements are often used in privately financed transactions or alongside alternative deal structures.

If you want to learn more about creative private investments, check out my book Invest Local — available on Amazon or as a PDF from DCBBooklist.com

Key Takeaways

Royalty financing can help buyers and sellers overcome valuation disagreements by tying part of the purchase price to future performance. When structured properly, it aligns incentives and creates a fairer way to share both risk and reward.

👉 Want deeper dives like this? Join my email list at DavidCBarnettList.com for early access to videos, insights, and 7 free bonus gifts.

A interesting interview with the host of ValuationPodcast.com - A podcast about all things Business + Valuation Melissa Gragg

 

In today’s episode, I’m joined by David C. Barnett—an international speaker, author, consultant, and one of the most respected voices in the world of buying, selling, financing, and managing small and medium-sized businesses.

Together, we take a deep dive into what really happens in the lower middle market and Main Street business transactions. Most owners hear headlines about billion-dollar acquisitions, but the reality for the majority of business owners is very different. We break down how buyers actually think about value, why sellers often misjudge what their business is worth, and how emotional expectations, financing realities, and risk perception all collide during a deal.

We also explore why many businesses never sell, what drives real valuation multiples in this space, and how sellers can better prepare themselves for a successful and realistic exit. This conversation is a grounded, eye-opening look at the “real deal” behind business valuation and M&A.