Question:
I am really excited about the idea of buying a business but, I am so worried that I may not make the right choice. The truth is that I have no clue what I should buy or even how to begin decising if any business I've seen is for me. I'm really stuck and feel that this may stop me from realizing my lifelong career dream of being my own boss. Help!
Answer:
If you're going to do one thing right during the buying process make certain that you buy the right business for YOU! For most people, this is the biggest concern when it comes to buying a business. After all, only YOU can determine what business is right for you!
Don't be alarmed, most people have no clue. At the initial stages of the process, the amount of businesses for sale can be daunting; the choice enormous. If you find yourself unable to focus on a particular type of business or if you really have no clue what you want, but you do know that you want to buy a business then sometimes you have to work in reverse.
Start out by noting all of the businesses that you don't want. If for example you're not interested in a restaurant, gas station or retail store, you can probably eliminate 50% of all listings. Next, note the level of capital that you have a available as your cash investment. Then, write down, in order of priority, what the business must have in place (i.e. less than x number of employees, in business for 3 years, no weekends, high margins, exclusive products and/or territory, etc.). Check off these conditions against every business you consider.
Next, get a true grip on your skills. Don't pretend to be something that you're not. The rule here is that whatever it is that you do best (sales, marketing, operations, etc.), must be the single most important driving factor of any business you consider purchasing. With business ownership, one of the main goals is for you to control your own destiny. Don't put yourself in a position where if one employee leaves, you're in big trouble. Your skills must be the fuel that drives the engine.
The right business for you is one that will thrive from your strengths and not suffer from your weaknesses. Take a long, hard look at yourself. Picture yourself in the business. Of paramount importance is that you must perceive yourself as enjoying the business. If you can't, then there's just no way that you can be successful. The business that you choose has to be one that you'll be proud to own.
Another key factor is to avoid falling in love with the product; rather, you must fall in love with the profit and the lifestyle that it can deliver to you. Many buyers begin to dream about all of the exciting things about the business and they become delusional about what can realistically be achieved. The product that the business sells, or the service that it offers, unless offensive in nature, is meaningless in the overall scheme. If the business does not produce the income you need, or provide you with a satisfactory return on your investment, then rest assured, you will learn to detest the product quickly. Likewise, a bland, boring product line can become very attractive if the business is growing and you're enjoying the work.
During the search phase, it's easy to become discouraged by the vast amount of available businesses. Don't get overwhelmed. Approach this methodically. If necessary, rule out the ones that you know that you don't want. Search through listings paying attention to asking price versus profits. Understand that listings do not always portray the whole picture. Send inquiries to the listed contact. Arrange meetings with sellers. Prepare the questions you need to ask. You cannot buy a business from a listing. Visit businesses. With each meeting you'll get closer to knowing what is and isn't right for you. Above all, get into the game. Once you own the right business, you'll never look back!
Question:
I had always figured that I should start a business or buy a franchise. After looking around a bit, I think that I should consider buying one that's already operational. What are your thoughts?
Answer:
With so many options available to you, the question will become which vein of the business ownership arena should you pursue? Between franchises, existing businesses, start-ups, home- based businesses and MLM's, it does become a bit overwhelming. When reviewing all of the possibilities you have to decide what will work best for you, however, your chances of success are clearly best when you buy an existing business or franchise resale, for many reasons. With any new business you have two challenges: developing the product or service and then seeing what, if anything, people are willing to pay you for it.
Regardless of a company's past performance, an existing business or franchise will, at the very least, have a history from which you will be able to make certain decisions. Even if the company was not profitable in the past, your strengths may lend themselves perfectly to turning it into a viable venture. Furthermore, you have the ability to verify what the company did in the past that resulted in the current status of the operation.
Ease of Investigation:
In order to buy the right business or franchise, you will be required to do a thorough investigation of its past activities, its operations, its current status, the competition, the industry and its future potential. You will accumulate this information and then you will have to determine how it measures up with you at the helm. Clearly, this information gathering will be substantially more accurate and easier to obtain when dealing with an existing business or franchise, as you will have the resources available from which to get the details.
Infrastructure:
You will have the benefit of purchasing a company that has an infrastructure, including customers, suppliers, employees, equipment and systems. This will allow you to focus on building the business as opposed to a start-up or new franchise where everything begins at ground zero.
Purchase Price Differences:
Buying an existing business or franchise does not mean that it will cost you more. In fact, many times it's less expensive than building a new franchised location or launching a start-up. Even in those cases where it may require a premium, at least you know what you are getting if you investigate it properly. With a new franchise, a good Master Franchiser will do demographic studies on population, drive-by traffic, potential customer base and a whole series of studies that will indicate that "theoretically" the business should do well. However, the only thing they cannot guarantee either by law or in reality is whether or not you will be successful. Also, new locations can take a year or more to build. You can avoid all of this when buying a resale.
Flexibility in Negotiating:
You will have far more flexibility when negotiating the purchase of an existing business or franchise versus any other options available; it's not even close! Everything from the purchase price to financing is open to negotiation. Doesn't it make more sense to put yourself into an environment where you have the greatest number of options available?
Question:
I've just decided that I want to buy a business. Now, I have no idea what to do next. What should I do to make sure I go about this properly?
Answer:
There’s a reason why buying a business is referred to as a “buying process”. There are a substantial number of steps involved and much to consider, especially for anyone who has never bought one before.
This is a major decision and investment. With so much at stake, it is crucial that you prepare yourself properly and educate yourself for this journey and take the necessary steps to be certain that you make all of the right decisions along the way.
According to industry statistics, nine out of ten people who begin the search to buy a business, never complete a transaction. Perhaps the biggest reason for this dismal statistic is that most people simply do not realize how much is involved.
Part of the challenge is that most are “first timers”. Faced with having to make one crucial decision after another, they become overwhelmed and frustrated and soon they abort the project.
Your approach must be different.
As Thomas Edison once said: “There is always a way to do it better…find it!”
This Will Take Time - Just Don’t Take Forever:
You can easily turn this entire buying process into an endless search. The average buyer spends 18 months looking. However, there’s no reason why you shouldn’t be able to complete the process in six months. If you’re working full-time, you will have to be disciplined in your search efforts. If buying a business is a goal you’ve set for this year, then block off at least ten hours per week to devote to this project.
Starting Off Right:
It is estimated that 70% of all searches by buyers are now conducted via the Internet. A short time looking at business for sale Websites and you’ll soon realize that the number of available businesses is incredible. In fact, there are hundreds of thousands of them out there. It would be very easy to turn this into a never-ending search instead of a buying process.
Instead of looking at endless business for sale listings trying to figure out which, if any, are right, you must first identify what type of business is right for you and then focus your search accordingly.
Take a good look at yourself. What are your strengths, weaknesses, likes and dislikes? Don’t try to be something you’re not. Most people simply don’t know what’s right for them and that’s fine. If this is your predicament, sometimes it’s best to start by ruling out all of the businesses you don’t want.
Next, consider your finances and focus solely upon those that make sense from an investment perspective. With these two criteria alone, you’ll be able to whittle down the choices.
Educate Yourself About This Process:
Unless you have a wealth of experience buying businesses, it is critical that you acquire the necessary knowledge and information to make this decision. You are going to face an onslaught of decisions throughout this process. Having the knowledge will likely make the entire difference between buying the right business and the wrong one.
Don’t fool yourself into thinking that your attorney or CPA can make these decisions for you, although it is extremely important to find quality advice from professionals that specialize in business. It is incumbent upon you to take the time to learn what is involved and how to successfully navigate your way to your dream. Think of it this way: if you’re going to invest your savings to buy a business; shouldn’t you first invest the time to learn how to buy the right one?
It’s been proven over and over again that well-informed, properly prepared buyers acquire good businesses; the rest get sold lemons!
This is one decision you must get right the first time!
Organize Your Finances:
You will definitely be required to produce a personal financial statement at some point. Get the details together right away. List all of your assets and liabilities and outline your net worth. Check your credit rating and rectify any erroneous information. You can obtain a copy at www.freecreditreport.com .
Make Sure Your Family Is On Board:
If you have a spouse/partner, be certain that you discuss this project together. It’s no use going down the road with this if they're not on board. You both have to see the dream. Business ownership is a time-consuming commitment. The hours are long. You need their support. Keep them informed. Answer their questions. Get their input. Remember, even though this may be your business, they’re in it too.
Determine Your Investment Level:
Determine with absolute certainty how much of your own cash you are prepared to invest. Forget any relatives who may have promised that they’ll “back you.” When the time comes to lay down the money, chances are they won’t be around.
Don’t bother looking at businesses that are unaffordable. Over 90% of small business purchases involve seller financing. Generally, this is 40% - 50% of the purchase price. If you have $100,000 to invest, don’t look at businesses that will sell for $500,000. It’s OK to dream, but be realistic.
Also, take the time to sit down with an SBA specialist to research all avenues for your financing. They provide all types of loans for entrepreneurs financing a business purchase. See www.sba.gov for further information.
Intermediaries-Do You Need One?
I am a firm believer in using a business broker to help you throughout the process. Keep in mind that the seller nearly always pays brokers and so their role from an advice point of view may be limited or even tainted. However, a good broker can, and will:
Your Six Steps To Success:
Commit to a deadline for buying a business (not just “looking” for one).
Question:
I found a business that is very interesting. I just love the product it sells. Unfortunately, it is not profitable. However, this product (which I can't disclose - sorry) seems like a winner. The seller has been trying to break into the market for three years without much success. Am I crazy to pursue this business?
Answer:
This is a great question. In fact, one of the 10 Commandments of my course for business buyers How To Buy A Good Business At A Great Price© deals with this issue specifically.
The Commandment is: "Fall in Love with the Profit NOT the Product". Here is the more detailed explanation:
A product or service without a customer is just excess inventory. When looking at a business, focus upon how much profit you can generate from the business and not on how "exciting" the product is. You would not believe the number of people who buy a business for the product and forget about profit. Here's what happens: they find an interesting listing. They visit the business. They like what they see (but haven't seen the right things). They then spend the next few hours, days, etc., dreaming about all of the wonderful things about the product, and they completely overlook whether or not they're in the real world about the business' profitability.
The most likely candidates to make this mistake are those that decide to turn a hobby into a business. For example, imagine that you are an avid golfer and you decide to buy a golf equipment store because of your love of the sport. For one thing, I guarantee that you will be playing much less golf (too busy working). Second, if the business goes sour you will quickly learn to dislike the sport and golfers themselves.
Profit, not product, is what pays the bills. The owner of any profitable business loves their product while the opposite holds true for a money-losing operation.
At times, the most profitable businesses are those with the most drab product lines (i.e. valves or shoelaces). I love the least sexy businesses imaginable. Conversely, a wonderful product that has limited demand is meaningless. Be certain that the product that any business offers has a ready market available to sell. In other words, do not get into a business where you have to create the demand and awareness for the product or service that you offer. This is a daunting and expensive undertaking (see dot-coms).
So when all else fails remember one thing: profit, not product, is what pays the bills.
Question:
Please explain absentee owner offers and what to believe. How often should the owner visit, how to manage, etc?
Answer:
Absentee businesses may sound like an ideal situation; however, it is very rare to find a highly-profitable, well-run absentee business. There are no hard rules for how often the owner should visit or how to manage. Each situation is different. There are a few things that you must be aware of to have a successful absentee-run business: you need above average, highly trustworthy employees. You'll want a manager who treats the business as their own. Consider having a profit- sharing plan or even giving them a small amount of equity. Do whatever you can security-wise; however, no matter how good the employees, or the manager, you'll probably have a higher than average theft rate. It's simple: if you're not there to police the business, it's going to happen.
Having said all this, let me state that I am not a fan of absentee-run businesses. In my experience, part-time effort means part-time results. If you're going to invest your hard-earned money in a business then you should learn it, run it, build it, and manage it. Once you have this down pat, then you can bring in others to take over slowly so you can spend time away from it.
Question:
I own a small, profitable printing business that has provided a nice income for me for the past 6 years, but the business is now at a point where revenue and earnings have plateaued and can’t be grown much further without a significant additional investment. I can afford to make that investment, but I’ve also become very interested in buying another business in a different field. If I did so I could hire a manager to run the print shop, but I am concerned that by trying to run two businesses at the same time I would end up not devoting enough time to either one. On the other hand, keeping the printing business would allow me to have a nice income while I’m trying to build up the other business. Would you recommend trying to run two businesses at once, or sticking with what’s worked and investing in growing the printing business further? Or, should I sell that business and move on to the next? Thanks in advance for you help.
Answer:
Great question! I admire the fact that you have logically concluded that your current business has reached its plateau without making a significant investment. Many business owners are not as perceptive as you and simply trudge along in the world of mediocrity. That is not what a true entrepreneur does; they’re always looking to build something bigger, better, and faster.
That being said, there is a lot to consider. Let’s look at all of the options you noted, then I have one suggestion for you:
Making the Investment in Your Current Business:
Practically speaking, this may be the best option for you since all of the unknowns that come into play when buying a new business are eliminated. You already know this business and the industry. You know what it will take investment-wise to get the business back on growth mode. However, it seems to me that you may simply be bored with the current business and need something new to dive into. There’s nothing wrong with that. I would, however, suggest that you go through the exercise of detailing how much you would need to invest financially and time-wise to build this business, and what you expect it to generate. Keep that figure in mind.
Buying a Business in Another Field:
Personally, I’m not a big fan of this idea unless you sell your existing business and can focus all of your efforts on this new (ad)venture. A new business, especially in a new industry, will require all of your time initially and so you want to able to focus completely on growing it. Also, keep in mind that, above all, you must buy a business that is right for you. The phrase I use over and over again is: “whatever it is that you do best must be the single most important driving factor of any business you consider purchasing.”
Hiring a Manager:
It all depends upon who you hire. Naturally, if there is someone currently in your firm that can step up to the manager’s position, that would be ideal. You should consider engaging this person and remaining on site full-time for at least three months to evaluate their progress. If you hire an outsider, you’ll have to remain on board for even longer. It is entirely possible that your first hire may not be right and you’ll have to start again. If you’re off running another business you’ll end up having problems in two places. Plus, if you’re not on top of a new manager’s performance, things can spiral downward very quickly.
Don’t get me wrong, I’m a huge fan of being able to bring in top people to grow a business. However, the people need to be right for the job. They need to have a big incentive to succeed. You need to be on top of the situation and prepared to remove and replace them if they do not produce results.
Selling the Business:
Of course this is always an option. Naturally, this brings with it a set of challenges. Most importantly: how are you going to present a compelling case for the future growth of the current business model to any buyer? While business buyers will often target growth as a key factor for them, many want to make certain first and foremost that the existing model is sustainable. Plus, you need to take the necessary time to properly prepare your business for sale and the process will generally be around six months to a year. During that time it is critical that the business does not decline or selling it will be far more difficult.
Another Option to Consider:
As I look back to the ten businesses I have owned, I can identify the one strategy that has produced meteoric results as easily as I can identify which acquisitions were disastrous or way below my expectations. Whenever I acquired a synergistic business, the results were phenomenal. When I got into something completely new while still owning the other entities, it was a mess. The lesson here, at least in my case, which I would counsel you, is to consider seeking out a strategic acquisition that can dovetail with or be folded into your existing business. Ideally, this would be an additional product/service that can be marketed to your existing client base, or a technology application that could be sold within your industry.
I simply believe (and this is just my opinion) that growing a business from an already successful foundation is a huge advantage. Have you thought about acquiring a competitor? Or making an acquisition of a complementary business? If you’re looking to revitalize your business and maybe even yourself, this can be a very viable option.
Question:
Some listings have a lot of relevant information and others seem to have almost nothing. How do I separate the good from the bad ones? What should I be looking for so I don't waste my time?
Answer:
Insofar as the detail of the actual information or lack thereof, please understand that you cannot buy a business off a listing. Quite often the initial information you'll see online is akin to a classified ad. Further investigation is always warranted.
A lack of information is not a reflection of the viability of the business nor does an abundance of information mean it's good. As a general rule, if the business is of interest to you send in an inquiry to learn more. In a detailed listing, there are over 70 things to look for but, in the initial listings, at the very least you'll want to examine the following:
Business Description:
First and foremost, make sure the business interests you. Look for key points that would make this business a solid candidate for growth (i.e. exclusive territory, large repeat client base, double-digit revenue/profit increases, growing industry, etc.).
Confidentiality is the key for a seller so the description may be generic, but it will provide enough information so you can determine the industry that the business is in specifically. Good businesses sell very fast in today's market so identifying the precise category of the business (if it's specialized) will allow you to begin gathering industry and competitive information.
Assemble some specific questions relative to that particular business to ask the seller/broker when you hear back from them.
Asking Price:
My favorite term. To me, it's an invitation to negotiate. So don't worry about the price, but of course be reasonable. You won't buy a million-dollar business for ten bucks but there is room. Likewise, don't chase listings that you know are beyond your reach. The average small business sale over the past seven years has been within 14% of the asking price. Of course, there are other ways to creatively structure a deal where the actual price plays less of a role. It's all in the terms!!
Seller's Discretionary Cash Flow:
The terminology may vary from site to site but you need to determine more than just the business' profit. As the new owner, you need to know precisely what cash you will have available (assuming everything remains the same) to service the debt, generate a salary for you, and fund the business/ growth.
As such, find out exactly what's included in the number being represented. Pay attention to "add backs" to be sure they are reasonable.
Down Payment:
The selling of businesses is most often a down-payment driven transaction. The asking price is far more flexible. Every seller has an amount that they want "in their pocket" after closing, which is the down payment amount. Again, this will prove to be far more rigid that the purchase price.
Many listings will list the price only, or the price and the down payment as the same, but rest assured EVERYTHING is negotiable. A seller listing the willingness to finance, or if the business has pre-qualified for financing, is usually well worth investigating further.
Skills Required:
These may not always be shown initially. A seller will usually put the most simplistic, "idiot proof" and basic skills in this section because the more specialized the greater the buyer base. As an example, they almost always mark: "general business/sales/marketing/administrative" which doesn't mean much but if they list a specific skill pay attention!
Reason for Sale:
Personally, I like all the morbid ones: death, divorce, etc. They usually mean a more motivated seller. However; relocation and retirement are also good indicators. I'm always leery about "other business interests" as a reason. I can never understand what someone's other interests can be if this is such a good business! But, you never know.
Miscellaneous:
Some listings will include financing terms, asset values, lease information. Others may not. Regardless, the seller/broker will have more information beyond what's been posted. Reply
Information:
You'll have an email address to reply to the ad and often a link to the broker/seller site. Remember, confidentiality is important to the seller, so your initial inquiry can ask a few basic question but the most important thing is to ask them to forward a non-disclosure agreement to you to sign. Then, you can begin to ask the real pertinent questions. Check it out as it will give you an idea of their professionalism, plus they may have additional listings on their site which are usually more detailed.
Question:
My wife and I are meeting next week with the seller and his broker of a business we are interested in, and we’re trying to prepare a list of questions to ask. So far we are drawing a blank. The business seems to be fairly straightforward (it is a retail Floral and Gift shop) and they have already given us basic financial information for the past 12 months. What else should we be asking for? Also, what is the real goal for this meeting?
Answer:
This is a wonderful question. I am pleased to learn that you are going to prepare yourself properly for the meeting. While there are numerous questions to be asked, you will want to see how the meeting progresses in general. It may evolve into a productive conversation.
Here are a few of the questions to ask the seller:
Your other point about what the real goal for this meeting is a very perceptive question/observation on your behalf. There are really three areas to focus on:
1. Answers and Research:
You want to get enough answers and detail to your questions so you can immediately focus on researching the business, the industry, the competition, etc. Although the Internet allows prospective business buyers to do phenomenal research and quickly, in today’s environment, good businesses sell fast - very fast. As such, you may not have a lot of time between a seller meeting and preparing an offer. Obviously, you’ll want to do your homework before moving to an offer, so be sure to get enough information in your seller meeting to conduct your research. On this note, always ask the seller if he/she has copies of any trade publications. They’re a great source for additional information.
2. Seeing Yourself In The Business:
If you take away anything from a seller meeting, it should be the answer to these four questions:
Questions 1 and 2 are obvious. Questions 3 and 4 are critical. If you like the seller and trust them, chances are you and they will be able to work through any and all of the deal challenges that will arise. Trust is also paramount. If not, you will always keep thinking they are hiding something.
I have been involved in hundreds of business sales and, in my experience, when the buyer wants to buy, and the seller wants to sell, and the parties trust one another, you cannot stop them from getting a deal done.
3. Impress The Seller:
If you have any chance of getting the seller to finance the deal, or bend more than they would normally on the deal terms, you need to leave them feeling that “you’re the one” to buy their business. If they believe that you can not only get the deal done, but also run the business successfully, they will go out of their way to make the deal happen.
So there you have it: a series of key questions to ask the seller, and the key points to focus on as your goal when you meet them. Good luck!
Question:
I have a regular job and I am looking to start a small business on the side. I would initially run the business on a part-time basis and employ a manager to run it and if it picks up fine, I am planning to quit my job down the line. Is this something that is possible? I am trying to buy a small pizza place or sandwich joint or ice-cream parlor. I want to keep the cost below $150,000. I have found a few listings in this range, with annual sales of around $300,000 to $400,000 and making a profit of around $40,000 to $60,000. In all these small mom and pop shops, I found that the owners spend a lot of time on the shop. My question is: can I run such a small business without full-time attention? If I employ a manager to run the show, how much will it eat into the bottom line and is that a reliable form of running this business? What sort of businesses can be run on a part-time basis initially? Thanks for your response.
Answer:
I certainly admire your strategic plan. Buying a business and getting it going prior to quitting a job that pays your bills is a good idea in theory. Unfortunately, the reality is that in small businesses, absentee ownership is usually only successful where there is not a need to have supervisory personnel in place to oversee the operations. Coin laundries work well. Restaurants don't. Self-service car washes are good. Retail stores aren't.
The barometer to use is: when a customer comes into the facility or conducts business with the enterprise, what are all of the possible challenges that may arise and can they be handled properly by someone outside of the owner, and at what cost?
As such, if your objective is to buy the business, hire a manager, and have a decent profit left for yourself, a pizza parlor may not be the right choice. The only time it will work is if you're generating at least $60,000 in profit. You can pay a manager $30 - $40k and be left with $20,000. As a passive investment, that is a reasonable return. But, there are other considerations:
Personally, I am not a fan of absentee businesses. I think part-time work equals part-time profits. Plus, there's no ongoing effort to build the business. Once again, I think you need to look more at businesses that really can operate without a manager. Or, simply be prepared for lower returns initially until the time comes that you're ready to work the business full-time.
Question:
I am recently retired from a large company but I am hoping to maintain a small income stream during my retirement. I am torn between buying a small business to run and investing in commercial real estate and becoming a landlord. Can you offer any advice?
Answer:
These are two very viable options; however, each one has completely different considerations that need to be made. So much depends upon what you'd really like to do. Commercial real estate is generally less of a risk than buying a business. However, the returns on your investment reflect this, with a business generating far better returns if you buy the right one.
The good news about buying real estate is even if you overpay a bit, as long as you have the financial resources to withstand any market downturn, it will recover. Real estate markets will run hot and cold, but in the long-run, they will always do well. Plus, the building will still be standing in a year. If you buy the wrong business, you'll likely be out of business.
Having said this, I personally prefer the option of buying a business over real estate. I prefer the higher potential returns and, more importantly, I truly enjoy the excitement of the business buying process and then getting into a new venture and building the business. To me, it is far more intellectually challenging than commercial real estate.
Owning commercial real estate is not without its challenges. There are problems that come with being a landlord and you may want to speak to some landlords and property managers to get a clear picture on what they do everyday. On this note, perhaps you can enjoy the best of both worlds and consider buying a property management business or another enterprise that deals in the world of real estate?
I'm sure an investment advisor would tell you to buy real estate or even to diversify and do both. It will all come down to what it is that you want from the investment. Owning a business, though the returns can be attractive and the gratification level great, does take work. In fact, it takes hard work and it is difficult to become successful if you only attack it on a part-time basis. But I'm a business-junkie, and to me the whole concept of business ownership, even with its challenges, is fascinating and I couldn't imagine doing anything else.
By: Richard Parker: President of The Business Buyer Resource Center and author of How To Buy A Good Business At A Great Price©