How to BUY a Great Business instead of Starting One
It’s true, there’s no amount of work or investing that equals the earning potential of having your own business. But business is hard. And risky. And a lot of the worst stuff that happens will happen during the start-up.
Not might happen. Will happen.
One of the ways you can avoid all that bad stuff and the risk that comes with it is to avoid the start-up. And you do this, quite simply by buying an existing business. All the groundwork is laid, the tough lessons have been learned, and there are important assets (like customers) already in place.
Why People Buy Instead of Start
There are a few different reasons for buying a business instead of starting one:
- To get in! It’s the quickest way to get into business.
- Expansion. One of the absolute best ways to expand your current business is to buy a competitor and bring in all of their customers.
- Diversification. Buying a business that has nothing to do with your current business or investments is a good way to diversify. All markets go up and down, and while some are going down, others are going up. The reason to “buy” is to take advantage of the knowledge and experience that’s in place, since it’s most likely an industry your not familiar with.
What Kind of Business to Buy?
This is an easy decision to make because there are only 3 kinds of businesses:
- A failing business. These are great because you can often get a floundering business for a steal of a price.
- A thriving business. These are great because the business is already a solid earner.
- Somewhere in between …
They’re all great. The main thing you need to know going in no matter what kind of business you buy is what YOU can do with it. What can you bring to the table to increase sales and lower costs? How can you take it to the next level?
Think about these things:
- Do you have customers or connections that have assured you additional sales if you buy the business? Sell before you buy.
- Can you source or negotiate better pricing on the business’s purchases?
- Do you have a lot more experience than the current owners in this type of business?
What Are You Buying Exactly?
There are two main ways to buy a business. One way is to buy it all; lock, stock, and barrel. The other way is to purchase it through an asset sale.
An asset sale means you’re just buying the assets. For the most part this is “stuff”. But keep in mind that there are a number of assets that you also want such as the rights to a brand. And a client list. Those are two huge assets.
The reason to buy just the assets is that the business is failing and you don’t want to take on an ugly balance sheet and all its liabilities. On paper, you’re just buying stuff. But with branding and customer assets, and by bringing in the key people you need from the “old” business, the transition can be relatively seamless.
Doing Your Due Diligence
Or, how to make sure you’re not buying a lemon. At least, not for more than a lemon is worth. Let’s look at some of the things that you need to go over with a fine tooth comb before you sign on the dotted line:
- People. Identify the company’s key people. Are they committed to stick around? Can you bring in the right people where needed? A good idea sometimes is to lock the current owners in to help run the business for the first few months or years. What kind of agreements are in place between the company and its people? What’s the salary breakdown?
- Plan. Go over the company’s business plan. See where things went right and where they went wrong. Is the infrastructure good or a heavy burden? Old technology or the wrong technology? What are the competitors that are succeeding doing? What will they be doing a year from now?
- Sales. Talk to some of the company’s customers; especially the big ones. You want to make sure they’ll stick around and assure them of a smooth transition. Work your own network to pinpoint opportunities to bring additional sales into the company. Look at the pricing structure and the competition. Is there room in the market for growth?
- Capital. Get an itemized inventory of all capital assets including serial numbers, etc. Get a lawyer to check for liens or debts secured against the assets. What do the outstanding payables and receivables look like?
- Purchasing. Ensure that there is significant margin between the cost of goods and the sale pricing. Use your network to find more cost effective suppliers and look to see where costs can be trimmed in the current operations. Is there too much useless inventory that’s not worth purchasing?
You have to prove to the seller that you’re serious about buying the business before they’re going to hand over all the internal documents you need to do your due diligence. That means proving you have the cash. Or can get it.
And If you’re trying to buy a company and they aren’t willing to give you everything with complete transparency, something’s really wrong and it’s time to walk away from the deal.
Getting the Cash to Buy the Business
The most difficult thing about buying a business is finding a great buy. But for a small entrepreneur, coming up with the cash can be just as difficult. Buying a business might even seem completely out of your financial means.
Being an entrepreneur requires a lot of will. And where there’s a will, there’s a way. Here are some of the ways to raise the cash to buy a business:
- Have the cash! Simple and obvious. But look at it like this; what can you sell, mortgage, or reduce the cost of to raise the money if you don’t have it lying around? You want to think carefully about the risks of jumping in with both feet. Sometimes it’s the only way.
- Personal loans. Nepotism can be a good, good thing. A cheap or no interest loan from family or friends has great advantages. Low cost of capital AND generous repayment terms can get you started quickly. Personal loans can strain relationships, but if your situation is good, they can be one of the best sources of capital.
- Institutional loans. Even billionaires usually get a bank loan to buy a company. The key to getting a loan to buy a business is to show that you can repay it. They most likely want you to put in some cash of your own, or put some security on the line like your house. You need a detailed business plan that’s solid and realistic, and you need full disclosure documents from the business that you’re buying. And … you can also use the assets of the company you’re buying as security to get a loan for their appraised value.
- Angels. There are many private investors who like to invest in start-ups or other business ventures. They require some equity in the business because they’re investors not lenders. But they also have business experience, and a network of connections that can be invaluable. Most cities have angel networks that stage regular gatherings and events where you can meet and pitch to angel investors.
- Form a partnership. Sometimes your best option is to form a partnership with one or more other people. Stay away from partnerships where one person puts up all the cash and the other does all the work. These arrangements are fundamentally flawed and they frequently end badly. What you want is someone or a group of people to go in with you to buy a business you can’t afford by yourself.
Remember; the cost of buying a business is not simply the purchasing price. You have to make sure you have enough operating capital to run the business until it’s pulling in positive cash flow. Don’t buy it and worry about operating capital later. Your operating cash has to be a secured part of the plan from the beginning.
There’s a lot of experience to be gained by starting up your own business. And buying a business, large or small, is a big step. But done carefully, you can bypass most of the start-up issues, capitalize on the company’s momentum, and gain a good headstart.
And just like that, you’re in business baby.