Buying A Business - The Basics
Whether you are starting your own business from scratch, going into a business opportunity, or buying a business, you need to have certain characteristics, traits, skills, and goals in order to succeed. So how do you know if you are ready to own a business? Basically, you need to ask yourself some hard questions and give yourself honest answers. If you don’t have the time and commitment to start a business, you need to look elsewhere for your income. You may be better served accepting a job with a company. There are those that need structure and a job is the place for them. But, if you are inclined to owning your own business, then lets discuss some necessary items. First, you need to have a plan. The plan can come from your own imagination, the franchisor, or the company offering the business opportunity. It doesn’t have to be something set in stone, and it doesn’t have to be fancy. It just needs to be a basic outline of what your business will be, what you will sell, how you will sell it, and what your operating costs will be. It is recommended that you include at least three months of operating expenses into your start up costs budget, which also needs to be determined in your plan. The next item is paramount to your success. It is the infamous 4 letter word and that is work.
If you'd like to be "set for life" as the owner of a multi-million dollar business -- sitting back and collecting a six-figure salary while other people (who have several years of business experience) "run" everything for you -- then this article will show you how.Listen to this: I've bought over 200 businesses in the past 40 years. In the first 25 of those years, I got owner financing. I got bank financing. I had vendor financing. I did all sorts of things. But, what happened was, I didn't realize there was investor financing. I actually discovered this on complete accident because I needed financing to buy a business in Mexico.You see, nobody was going to finance anything in Mexico. Even today, they won't. So, I had to go back to the investors we had and talk to them. I didn't even realize they would do something like this. So I just sort of lucked into this. And now, for the last 25 years, we have never gone to the bank other than for a line of credit. We don't ask for owner financing. We pay 100% cash on the deal which means the seller gives us a better price than a small cash price. We don't have to qualify. We don't have to give our financial statements. We don't have to do anything. In fact, the average seller will tell you they don't care who you are or what you are if you give them all cash. So what happens is, if you bring an investor in, as opposed to all the other types of financing, it's a lot easier way to go.The other thing with an investor is most of them will ride with you for four or five years. In other words, if you show them what their share of the profits are going to be for four or five years, many of these investors do not ask you to pay a return every month or every quarter, which means you have all the cash available in the business for a four or five year period to expand it. It's really a fantastic way to go, but I want to tell you for the first 25 years, it never dawned on me because I didn't know how to find investors.But now, that's what I use almost exclusively. And I find it's not only cheaper (almost free), but it allows me to buy more businesses and have less work. Reason why is because investors will only put up money for businesses worth a million dollars or more, with an experienced management team already in place. Which means, if you show up, you're almost in the way. The management team you're paying doesn't want you there mucking things up. They would rather you be out playing golf or something. It's a great way -- the only way -- to do business. If you want to pull your hair out buying sandwich franchises and "mom and pop" donut shops, that's your choice. But I'm here to tell you from 40 years of experience buying businesses, it's actually faster, easier and cheaper to buy large, multi-million dollar businesses, where your only real "job" is to cash the checks.
Buying a Business - Steps
When buying a business, there are some key steps to follow that will enable the process to proceed more smoothly.Which Business to BuyStart with deciding what type of business that would best suit you. You are most likely to be successful at a business in which you can make good use of your skills and experience. In addition, you will want to select a business that you would be passionate about since you would be investing not only financial resources but a good deal of time.After deciding what industry you want to invest in, consider what size business to search for. Analyze your management skills as far as the number of employees, volume of sales, location, etc. Of course it will also be necessary to explore financing options as well as your own financial situation. This will enable you to see what you will be able to afford to pay for a business.The Search Take your time in this business buying step to ensure that you are researching all avenues so that you find the best overall fit. Consider enlisting a business broker to help you. Also, there are many resources on the Internet that can help you with this process.Investigate the BusinessOnce you find a business that you believe would be the best match, there are several items to consider. Be sure to do extensive research on the business and its history. Discover the true reason the business is for sale by speaking with people who are familiar with the company such as local realtors and other business owners in the area.Before meeting with the seller, do some reading and/or speak with a professional as to what is appropriate to say or not to say at this point in time. The seller will also be considering how the buyer comes across as a prospective owner of his/her business.When you meet with the owners, you will need to make sure you find out what is included in the asking price. Also, determine if the assets are clear of debt.Examine the financial statements of the business, preferably with the assistance of an accountant in order to determine the past performance and the stability. If you are not certain that you are getting a clear picture ask for the business records and have your own audit done.You may also wish to ask permission to sit in on the business for a few days. This way you can get a good feel for what it would be like to be the owner of this operation.Pricing and FinancingThe next business buying step will be to determine what the business is actually worth. Analyze the worth using several methods including book value, modified value and replacement value. Find out how the seller derived his/her price and compare to your calculations. Then make sure you can really afford the business. In addition to your own contributions, see what financing options are available including loans from banks and credit unions. Family/friends may also be willing to invest.AgreementsWhile investigating the business, you may have a contract attorney draw up a letter of intent (LOI). This is a document that is a formal understanding that you and the seller are in negotiations, not a binding contract. Therefore if you should find anything you dislike, you don't have to go any further in the process.Finally if all goes well, have your attorney draw up a final contract. The attorney will specify all the details of the deal. Then you will be ready for closing.After all these business buying steps are completed and everyone signs on the dotted line, you will be ready for the next big step of owning your new business.
Owning Your Own Business - The 10 Things You Must Know
On the face of it, it should be a lot less risky now than it used to be to buy a business from a stranger. Most (but not all) States and Governments in the developed world have brought in stringent disclosure rules which aim to even things up between the supposedly rapacious seller and the innocent purchaser.Certainly these rules will expose or prevent blatant fraud and misrepresentation, but they can also lull you into a false sense of security. The very worst thing you can think is "Oh well, if the figures don't turn out right I'll just take them to court and sue the pants off them".If you're stuck with a dud business as a result of being deliberately deceived you certainly can take them to court. But you don't need me to tell you of the costs of litigation, the time it takes (years!), and the very real chance you may not succeed anyway.And in the meantime you have to spend your days desperately running a business that may not generate enough to cover these legals. Remember also that lawyers will only take on work on a contingency basis when they think their chances of success are pretty good. It's way, way better to get it right in the first place.Even though most sellers usually turn out in the end to be nice ordinary honest people, I as a valuer always look at them and their businesses with a suspicious mind, and you should too. Because the truth of the matter is that they know far more about the business and what is happening in the industry than you do, and they are quite within their rights to not tell you everything. If you don't ask, you may not find out until it's too late. "Caveat Emptor" is the Latin for "Let the Buyer Beware" and it is still true today despite all the well-meaning but bureaucratic attempts to shield you. Some of the traps I have listed in this and following articles may be legislated against in some jurisdictions and others may have to be disclosed by the vendor. But it pays to know about them anyway.I'll give you these tips roughly in the sequence in which I would check them out. Let me tell you now that everything is wrong with the business I select, but of course I don't know that when I start out. And if it were real I would walk away very early in the piece.I have chosen a retail business to illustrate these traps, but most of them apply equally to service and manufacturing businesses. I have not specified what type of retail business it is, for very good reasons.First, the facts and figures have been made up and do not represent any particular type of business. Second, the same type of business can be totally different in the way it operates and in its risk level from one country to another and even from state to state. Third, I would not want to give any type of business the bad name that this (imaginary) one deserves.So let's assume it is a general type of retail business and call it the GRB (General Retail Business) Shop. Let's also assume that it is a reasonably secure type of business, though somewhat sensitive to competitionLocation is paramount for retail and most service businesses (though the internet is changing that) but less so for manufacturing enterprises.The business broker gives me a half dozen businesses to look at. I select one that seems to be in the right price range - the asking price is $230,000 plus S.A.V. (Stock, (or Inventory) at Value) - and not too far from home. So I pay a visit.It's in a small suburban shopping mall that looks about 20 years old. The mall is busy for early Monday morning, which is a good sign. The shop is well located within the mall with good traffic flow and prominent signage, but is a little bit tired in appearance. A quick check shows it is the only one of its type in the mall. The owners seem friendly and cooperative. I ask if they do home deliveries. They do and take me for a ride around the area covered. There is a new housing estate going up close by which they say will increase business in the future, and the next nearest business of its type is some distance away.Trap 1. Not Being Told of Known Competitor Plans:I leave and decide to have another look at the housing estate. At the far end of it I discover a large sign announcing the imminent construction of a mega shopping mall with a GRB type of business already signed up. So the business is under threat from new competition nearby.The message here is, don't just check the location, check what is happening in the area. Talk to other shopkeepers, talk to locals, visit the council, and look at the demographics to see if they match the market for your products or services. There may be a new highway going through in five years time resulting in a property resumption, or a diversion of traffic away from your site - or it could be good news as well.
Owning Your Own Business - The 10 Things You Must Know