BUYING A BUSINESS IS ONE OF THE BIGGEST LIFE DECISIONS YOU WILL EVER HAVE TO MAKE
If you think you’re going to be the next hot tech startup and IPO for 10 billion dollars, this process isn’t for you. We believe that starting a business from scratch isn’t the only way to be a successful entrepreneur. Buying an existing business has many advantages but it doesn’t mean any less work than a startup. The process can be complex and daunting, but if it were easy – everyone would do it.
The Buying Process
Step 1: Ask yourself these questions
- What kind of business do I want to buy?
- What is my timeline to start a business and is it realistic?
- How do I figure out how much money I’ll make?
- How much money do I need to make, even when times are tough?
- How can I afford it?
- Do I qualify for any kind of financing?
- Will my friends and family support me?
- If the business fails, will I look back and be happy I gave it a go or will I be devastated?
- What I am good at and what should I be outsourcing within a business?
These are the tough questions that you need to ask yourself and fortunately for you, this quiz has no wrong answers.
Step 2: Find the right business
Once you’ve answered the above questions, you can start searching for businesses that match your criteria. Unfortunately, there isn’t one central location to search for businesses for sale and some might say the good ones aren’t even listed online. But don’t be discouraged. If you work with a good broker they will do most of the heavy lifting and present you with pre-screened options for you to review.
Step 3: Take a Closer Look
Once you’ve found a potential business, the preliminary analysis starts with some basic questions. Why is this business for sale? What is the general perception of the industry and the particular business and can I increase its profitability?
Most importantly, I like to ask myself why shouldn’t I buy this business and if something went wrong is it manageable?
Here are some items to review and consider and request:
1. Amount of inventory – is there too much or too little?
2. Furniture, fixtures, equipment and building
3. Copies of all contracts and legal documents
4. What is the business structure and why was it set up this way?
5. Tax returns for the past five years
6. Complete list of liabilities
7. All accounts receivable and history of bad debt
8. What does the customer concentration look like?
9. Industry and market history
10. Reputation of the business
11. Seller-customer ties
And, of course, there are many, many more.
Whether you use a broker or go it alone, you will definitely want to put together an “acquisition team”–your banker, accountant and attorney–to help you. These advisors are essential to what is called “due diligence”, which means reviewing and verifying all the relevant information about the business that you are considering. When due diligence is done, you will know just what you are buying and from whom. Does–or can–the business control enough market share to stay profitable? How have the company’s product or service lines changed over time?
Step 4: Negotiating a fair price
No decision is more emotionally charged than deciding upon a price for an existing business. The owner has one idea of how much the business is worth, while the buyer will typically have another viewpoint. Each party is dealing from a different perspective and usually the one who is best prepared will have the most leverage when the process enters the negotiating stage.
Keep in mind that most sellers determine the price for their business either arbitrarily or through a special formula that may apply to that industry only. Either way, there usually aren’t very many solid facts upon which to base their decisions.
Price is a very hard element to pin down and, therefore, is for the buyer to assess. There are a few factors that will influence price, such as economic conditions. Usually, businesses sell for a higher price when the economy is expanding, and for a much lower price during recessions. Motivation also plays an important factor. How badly does the seller want out? If the seller has many personal financial problems, you may be able to buy the business at a discounted rate by playing the waiting game. On the other hand, you should never let the seller know how badly you want to buy the business. This can adversely affect the price you pay.
Lastly, there are many ways of evaluating a business using various tools and metrics. At the end of the day, the number has to be something that you are okay or slightly uncomfortable with. If the price is too good to be true, then you should spend extra time in the due diligence phase. When you take over as the owner, the price doesn’t matter anymore, it’s all about being an entrepreneur now. Go get ’em tiger!
Step 5: Closing the sale
This is where your acquisition team comes in to do what you’re paying a lot of money for them to do. The finish line is just around the corner, so try not to burn out, and remember, it’s natural to have cold feet – this is healthy. Stay focused on the questions in Step 1 and soon you’ll be a proud new business owner.