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.
My occupation centers around helping business owners analyze their assets and coaching them on decisions as to whether or not they should sell all or part of their businesses. As such, I am privy to a wide variety of business information and I can tell you first hand, I tend to see a lot of bad operations. Additionally, based on my experience of having owned and operated several businesses myself, I also coach buyers on what to look for in a business and how the process of buying a business works. So it is not uncommon for me to skew to the negative side of things and to look for warning signs that could potentially hurt either party in a business resale transaction. I don't enjoy searching for the negative aspects of business, but I know them and I work hard to seek out, identify, and mitigate the impact that these risk factors may have on either party.However, I don't always find things that are bad. And during this time, with all the doom and gloom of our present economy, I thought I would share a story with you about an operator that stood above the crowd and ran an excellent business.Several years ago, before I began to specialize in the sales and acquisition of convenience stores, I worked as a transactional broker in multiple industries. One of which was the hotel and motel industry. At the time a friend of mine happened to own a boutique hotel in the Caribbean on the island of St. Croix, U.S. Virgin Islands. One day he mentioned to me that he was tired and since he had owned the hotel for several years he had decided to sell it so he could spend more time with his family. I agreed to help him and began to review his books and records. Upon initiating my review, one of the first things I noticed was that he was doing a good business...a very good business. By that I mean he was running a 90% occupancy rate and had been for several years. It wasn't like he'd just had a good year or two; he had been having very profitable years for quite some time. When I asked him how he had managed to get the occupancy rate to 90% and keep it there, he said that over the years, during the slow seasons, he would make several small changes to the property to maintain a fresh business. Every six months or so, he made sure to do something different to his hotel. It could be a new painting on the wall in the lobby or new trash containers or new towels, etc. But he would always make some change or add something new for his customers to see.When I asked him why he did that, his reply was, "My customers expect to see something new all of the time." He explained, "You see, even though a lot of my customers may be transient, many of them are not, because I work to keep them coming back to me every year. They enjoy their experience at the hotel and they want to see something different, even if it is a little thing." He also mentioned to me that when occupancy would begin to drop-off he would personally go into the town and offer air conditioned rooms to the locals for a reduced price to help fill his rooms and continue to generate cash flow.Wow, I thought. What a novel idea. He went and asked for someone's business.So I began to work at selling his hotel. I can't tell you how many interested people I had look at his hotel. Finally I found a businessman and his son from Ohio who had seen the property, met with the owner and had even gotten the accountant involved in the sale of the business. But just when I was about to write the purchase agreement the deal came to a screeching halt. The buyer said that he could not buy the business.I asked him why? Was it because of the asking price? Was there something wrong with the cash flow or the numbers of the business that did not look in order? No, it was none of those items at all. The numbers were great and the assets of the hotel were in excellent condition. The answer to why he could not buy the business still rings through my ears today as clear as if it was yesterday. He said, "I cannot buy this gentleman's hotel, because he is doing such a good job of operating it that there is no more upside left for me." He said, "I cannot begin to operate it any better than the present owner, because he has done everything right in operating the business and continues to do so even during the hard times."Astounding as it may sound, this hotel was the proverbial case of a car with eight cylinders running on all eight cylinders and doing so well that there was no more upside left in the business. The business was doing too good to be considered salable.It wasn't until some years later that I encountered this same issue again. I was contacted by a gentleman who owned about 12 convenience stores and had decided that he wanted to sell about half of them to reduce his work load. Here again when I inspected the quality of the physical assets of the stores and reviewed his books and records I discovered that I had encountered another "eight cylinder car running on all eight cylinders".The man and his team were great operators. Whenever something broke in the store or something needed replaced or maintenance on the outside, they fixed it. I could not find a blemish anywhere and most of the stores were over 5 years old. His merchandising and floor plan was laid out well and the store traffic flowed. Every time I visited a store they had merchandising specials throughout the store from different vendors. All of his stores were very profitable and operating well. I remembered the hotel in St. Croix and prepared myself for some tough sales. But I was wrong. I ended up selling all the stores he asked me to sell. I know that the people who bought those stores were happy knowing they were buying excellent running assets. And they were especially happy with the fact that all they had to do to maintain the stores success was to continue with the process of running the stores the same way that the previous owner had.So what is the moral of this story?When buying a business you always have a choice. You can buy a business that is an excellent running business and all you have to do is show up and do the same things that the last owner was doing. This would be like buying an eight cylinder car that is running on all eight cylinders.Or you can buy a business that needs some attention and some tender loving care and has more upside, but will also take more work to get the business tuned up and running well. This would be the eight cylinder car that is only running of six cylinders and needs work. In other words it is a fixer upper.Either way you go you will always generally be farther ahead than trying to start a business from scratch and doing it the hard way. So go for it. Find the business that suits your taste and then decide if you are buying a fixer upper or one you can walk in and is ready to go and begin to enjoy the journey.
Buying a Business - The Best Or a Fixer Upper?
Lots of people have the dream of owning their own business, but they get bogged down in the details of how to go about it. While this article isn't meant to serve as a complete business start-up guide, it will give you an idea of some steps to take.1.EntitiesThe two most important professionals you will need to begin are a lawyer and an accountant. The lawyer can help you decide if you want to be a corporation, partnership, sole proprietorship, or some other type of company. A good accountant can help you make the decision based on what will be most advantageous for you from a tax angle. Your lawyer can also help you register your business and get the licenses and permits you need.2.Make a Business PlanYou need to get a business professional to help you writ a business plan. You will need one to help you get organized and to help keep your goal in mind. This could be anything from serving hot dogs to people outside your home to providing technical support. Either way, you need a plan that sketches out how to proceed and an estimate of how much money you will need. 3.Get FinancingHow much start-up money will you need? Do you have the savings? Do you have friends who would want to invest? Do you need a Loan? Whatever your plan is, you will need to present a copy of your business plan to bankers or investors if you need to loan money to get the company rolling.4.A Record-keeping SystemA good accountant can advise you on the best record keeping software for your business, and help you set up a system for keeping track of payables, receivables, sales tax, payroll, employee benefits, and so forth. You will rely on the accountant for at least your yearly return, and possibly for quarterly payroll and sales tax returns. Your accountant can also get you an EIN number (Employer Identification Number).5.LocationDepending on your business, location may be important. If you are not going to run it from your own home, location can make or break you - and the rent is due no matter which way the tables turn. You will also need to get a phone, get the utilities turned on, install your furniture and equipment, and get a sign or two.6.Accounts with Credit Card CompaniesYou will need to invest in a method for checking the validity of debit and credit cards.7.EmployeesYou may not need to do this step if you are a one-person operation. Maybe you can get by with just one part-time person to answer phones and do some paperwork. It just depends on your business. You will need to have them complete various forms for the IRS, and you may want to run a background check. 8.Promote your BusinessDecide how you will let people know you exist, what you can do for them, and why they should come to you. You may want to advertise on TV, have a radio commercial, newspaper ads, flyers, and coupons.The list might make you think twice about starting a business of your own. But, you can do it without all the headaches of traditional business. There is a very simple way of attaining the goal that has worked for millions of people. The best part of exploring home-based business opportunities is that there is little risk and the upside is tremendous. Many of the pressures of the traditional business are wiped away with the home business.
Own Your Own Business and Live Happier
Are you learning about Buying a Business? For most people, buying an existing business is a better option than starting one from scratch.Buying A Business is generally better than Starting a BusinessBuying an already operating business has an existing cash flow, established customer base, vendor relationships, trained employees, and an established business location.All of these critical factors are non existent with starting a business from scratch. It will take time and a lot of hard work just to get a new business of the ground. In addition you will be literally burning through cash the first year and it's safe to say you should have at least 6 months to a year of personal savings in the bank that can cover your family's expenses while your new business is developing.The choice is easy. Buy an existing business with a proven cash flow so you have immediate income.Financing a BusinessFinancing an existing business can be time consuming but it depends on the route you go. Most small business owners will carry owner financing on a percentage of the deal. So if the total deal price is $100,000, you may only need $20,000 - $40,000 as a down payment and the sellers may carry the balance. Most sellers will carry the loan for 5 years at 6% -7% interest. They may also allow you to finance the loan over 10 years but require a balloon payment in 5. You should always try and get the seller to carry a portion of the financing fist. It's the easiest method in getting a deal done. If the seller will not carry a large enough portion with your down payment then you can look at alternative financing.So how much do I need as a down payment? You should have 5% - 20% of the total purchase price as your down payment. For seller financed notes they may require up to 50% down but this will vary widely with each deal and sellers personal requirements.No Money Down loansIt is a common misconception with Small Business Loans (SBA) on how easy they are to get. First and foremost, there is no such thing as No Money Down Loans when it comes to buying a business. Even before the credit crisis they did not exist. You will need at minimum 10% of the total purchase price as a down payment to get bank financing. Most small business lenders will not loan on purchases under $100,000 - $150,000 and they have additional requirements.Personal Requirements in Financing:10% Liquid Assets as down payment (They will prefer 20%) At least 6 months experience working in a similar business or managing another business A good credit score 620 and above minimum and no recent bankruptcyBusiness Requirements in Financing:The business will need to provide at least 2 of the most recent tax returns and the current years updated Profit and Loss statement.The business will need to show it has sufficient provable cash flow after the loan debt service and the buyers personal financial requirements.If you do not meet all 3 of the personal requirements and the business does not meet it's requirements then you most likely will not receive an SBA loan and will probably be wasting your time. You should focus more of your time on either negotiating with the seller to carry the financing or find a different business.Other Financing Sources:There are a few other ways you can finance the business but it will require refinancing personal assets like real estate.What Type of Business Should I Buy?Look for a business that has some connection to types of work you've done in the past, classes you've taken, or perhaps skills you've developed through a hobby. It's almost always a mistake to buy a business you know little about, no matter how good it looks. Also, try to choose a business that you're excited by. It's easier to succeed in business when you enjoy the work you're doing. Where to Look when finding an Existing Business For SaleThe first place you should look is contact a local Business Broker. Business Brokers are professional Business Advisors, intermediary's that assist buyers and sellers in the sale of a Business and generally are paid fees by the seller. A broker will help you in everything from researching businesses for sale, negotiating the best price for the business, financing the business, incorporating your business, and much more.Although brokers are paid commission by the seller, their interest is in selling the business. Therefore a good broker will work with both the Buyer and Seller in negotiating the most favorable terms for both parties.Brokers are one of the best resources to use when Buying an Existing Business.How to find A Business Broker or Business for Sale:You can find a Business Broker by looking in your local yellow pages or online by using business for sale website like The Business Broker Journal. This site is mainly a marketplace for business brokers as a place to advertise their businesses for sale.
I Own a Small Business, Do I Need a Business Lawyer?