Each year thousands of Americans cut the corporate umbilical cord and acquire their own business. Being a business owner is both tough and rewarding. An individual must be low in uncertainty avoidance in order to make the leap. There are two types of people in the world, those that make money for others and those that make money for themselves. Some people are very happy with a nine-to-five job and collecting a continual paycheck. There is nothing wrong with that. Others, however, have a burning motivation to be their own boss and to blaze their very own trail. The later would have what we call the entrepreneurial spirit. This purpose of this article is to present some tips to those serious about making that jump.
Tip number 1, Buy an existing business: Sure, you can start a business from scratch, but your chance of failure is considerably higher. Buying a well established business with an active customer base and a confirmed cash flow is a lot less risky and your odds of “making it” are significantly greater.
Tip number 2, Decide what type of business to buy: It is vital to buy something that you can enjoy owning at a location that you can live with. If you hate pizza, don’t buy a pizza shop. Buy something that you will be happy owning. If you detest the city of Philadelphia, don’t buy a business in the city of Philadelphia. My office gets phone calls all the time from buyers who have no idea of what they want to buy or where they want to buy. It seems as if they concentrate more on the cash flow number. While cash flow is definitely an important variable, it should not be the single most crucial factor in deciding to buy a business. Decide whether you want a service based, retail based or manufacturing based business.
Tip number 3, Determine whether you can afford to acquire a business: Many people never make the leap because they think that buying a business is a financial impossibility for them. The reality is, generally you do need some capital, but perhaps not as much as you think. There are several sources for financing the purchase of a business. An SBA (Small Business Administration Loan) can usually be acquired if you have a good credit score, some relative experience in the category of business that you want to buy and 20% of the purchase price. The acquistion can also be funded with seller financing in the form of a promissory note or an installment purchase agreement. A acquistion can even be funded through your 401k or IRA.
Tip number 4, Surround yourself with professionals: Buying a business is likely one of the most important occasions in a person’s life. It is very important to surround oneself with the appropriate professionals. There are three important people that you should use to assist you in buying a business; they are a business broker, an lawyer and an accountant. Business brokers are instrumental with identifying businesses, negotiating the price, and getting everyone to the closing table. You should select an lawyer that has practical experience with business transactions. Do not use your relative or close friend that happens to be an attorney if they specialize in anything other than transactional law. You don’t need a powerful Philadelphia lawyer, but an lawyer with knowledge of Asset Purchase Agreements is a must. A CPA can be instrumental in the due diligence stage of the acquistion. They will scour the books and records of the company to make sure the represented revenue and cash flow numbers are correct. They can also educate you as to the tax implications for the allocation of the purchase price. Most major life events need the assistance of specialists, acquiring a business is no different.
Tip number 5, Identifying the Business: Once you have identified what kind of business that you want to own and the location you want to be in, the next step is discovering a business that meets your criteria. There is no magic list of businesses that are closely held to the chest of businesses brokers. Normally, most businesses are marketed on the internet on two key internet sites, www.bizbuysell.com and www.bizquest.com. While it may well be true that some brokers don’t publicly market some businesses because some Sellers want the utmost confidentiality, most brokers list their businesses for sale on those two sites. You or your broker should complete a search to locate companies that fit your profile. Try to find businesses of the type that you desire that are throwing off enough cash flow to sustain your personal obligations and give you the ability to expand the business.
Tip number 6, Put together questions for the Seller. There are many essential questions that a potential buyer should ask every Seller. The first, why are you selling? This is the most common question of the initial meeting. Sellers decide to sell for a wide variety of different purposes. The best-case scenario is that they are retiring. Some are pressured out by partnership disputes or divorces. Others legitimately want to pursue other business opportunities. Some business owners spend so much time and effort getting a business off the ground that they are plainly burnt out and want to cash in. A buyer should be leery of any business with a historical downtrend in revenues or cash flow. Sometime Sellers want to get out because they foresee a continued decline in their business or because they know of some impending situation that will undoubtedly harm their business. Whatever the reason, make certain it is a sensible one. Secondly, ask the Seller if they know of any reason that business will downtrend in the near future. Find out if there is a big competitor coming to the area or some legislation that is poised to have an impact on the business. Third, find out who the crucial staff are, what their roles are and if they would be likely to continue to work under a new owner. Fourth, inquire about the immediate competitors, who they are, where they are and what percentage of market share they have. Fifth, find out how long the owner is willing to stay on to assist with the transition. There are a lot of questions that a Buyer should pose to the Seller. The most important thing is being prepared with questions.
Tip number 7, Make an Offer. You have located your dream business and now you are in a position to make an offer. There are various key things to know before doing so. Do not sign an Asset Purchase Agreement at this stage. Buyers want to sign something much less committal such as an Offer to Purchase or a Letter of Intent. You want to make sure that your offer has a due diligence contingency, a financing contingency if appropriate, a lease transfer contingency if relevant, a liquor license transfer contingency if applicable. You also want to make sure that your offer contains the main terms of the transaction so that the drafting of the Asset Purchase Agreement is more of a formality. Be cautious with making an offer that is too low. You do not want to insult the Seller and potentially kill the deal on the spot. Make a realistic offer and leave yourself some room to negotiate with the Seller.
Tip number 8, Engage in thorough Due Diligence: This is a Buyer’s chance to basically open up a business to confirm that it is as financially healthy as claimed. Most due diligence is done merely by looking at a Seller’s tax returns and profit and loss statements. The represented revenues are very easily discernable by simply looking at the tax returns. Things get more difficult when a buyer tries to vet the represented cash flow. If a business is being marketed at 2 million in revenues with a $500,000 cash flow, buyers want to make sure that the cash flow number is accurate. Most of the time, the purchase price is based on some multiple of cash flow. If you discover that the amount is less than being represented you have reason to renegotiate the purchase price or cancel the transaction. Although tax returns and profit and loss statements are excellent resources to conduct an initial due diligence, buyers ought to go beyond that by checking merchant account histories, internal revenue reports, bank accounts, etc. The typical due diligence period is somewhere between 30 to 60 days. This is the Buyer’s time to make certain they are getting what they are paying for.
Tip number 9, The Closing: Once completing a thorough due diligence it will be time to proceed towards the closing. The closing really should be a mere formality. All negotiations really should be carried out and all documents really should be all set in advance of the actual closing day. You don’t want to be sitting at the closing table with a negotiating stance. The parties may potentially have to sign a myriad of documents. The lawyer and bankers ought to take charge of the closing. Buyers and Sellers typically sign away and collect their checks or keys. This should be an exciting day for both the Seller and the Buyer.
Tip number 10, Now you own it, do not make any drastic adjustments: The most significant mistake a new Buyer can make is making drastic changes to the business. If the business that you bought has a sound record of revenues and cash flow then there is no reason to make immediate major adjustments to the business. You risk alienating customers and your revenue stream. I have seen this take place time and time again with business buyers right here in the Philadelphia area. Try to make as little of an impact on the face of the business as feasible. Of course new owners have their own thoughts and want to make adjustments. If that is the situation, make the adjustments as subtle as possible and over time. It is a totally different case if the buyer has obtained a distressed business. If that is the scenario, then the new Buyer has to make drastic adjustments to turn things around.