There’s more than one way to succeed as an entrepreneur. Beyond
starting up a business – witness our brand name! – you might be able to
buy an existing business instead.
And in case
you’ve dismissed the idea of buying a business because of the up-front
money it requires – the same money you already blew on your brand new
car – think again. With some creative financing ideas, you might be
surprised what you can afford.
Here’s some vital info about choosing a business to buy and whether it’s for you:
The business is a known quantity:
The best argument for buying an existing business is, well — that it’s
an existing business. In other words, it’s got a book of customers, a
name or brand, probably some physical assets, relationships with
vendors, likely a line of credit, an established market, some
experienced employees, and all the other things that a startup lacks.
It’s the basic idea behind a franchise opportunity as well.
“It’s
also much easier to value an established business than a sheer concept,
because you have data to work with,” says Rita Gunther McGrath, an
associate professor at Columbia Business School and co-author of MarketBusters: 40 Strategic Moves that Drive Exceptional Business Growth.
You
might be asking the obvious: If a business is any good, why on earth
would it be for sale? “Death, divorce, illness, retirement of the owner
– those are the most common reasons,” says Richard Parker, president of
DIOMO Corp., a Ft. Lauderdale, Fla.-based consulting company. “You also
get people who are just plain bored with doing it anymore, or they have
other opportunities. The average business turns over every five years .”
“Succeeding
in buying a business is a matter of solid research, realistic
assumptions, and an unemotional strategy,” says Jim Chamberlain, a
retired business owner who advises Orange County, Calif., entrepreneurs
as a member of the Service Corps of Retired Executives. If you do get
emotional about choosing a business, you might also find yourself
overpaying or overlooking fundamental flaws that are too difficult to
fix under your ownership.
Re-energizing a tired business:
Let’s face it, some businesses slow down or start running on neutral.
In those cases, the best business to start may be one that you can
quickly transform by fuel-injecting it with your energy, capability and
creativity.
That’s what Dan Brady did when he and
his father and brother bought out existing Mail Boxes Etc. (now “The
UPS Store”) franchises in and around Philadelphia after learning that
starting fresh can be much more risky. “Everybody wants a new house!”
Brady says. “But we’ve learned over time: If you buy a tired
pre-existing location with an existing customer base and cash flow, and
infuse it with operational smarts and great execution, the rate at
which you can grow positive cash flow and your odds of success go way
up as compared to starting the whole thing from scratch.” (Check out
the Brady’s key move in seizing this franchise opportunity.)
This
strategy could work best for you even if you believe that no existing
company does what you want to do with your business idea. “When someone
says to us, ‘I’ve got an idea to revolutionize’ whatever, they say
they’ve got experience going for them,” says Ted Leverette, president
of Partner On-Call Network, a North Palm Beach, Fla.-based consultant
to business buyers. “But we say: ‘You’re fooling yourself. Let’s go buy
an established company in the field but one that’s troubled. Then you
can revolutionize that product or process.”
A business that fits with your place in life:
You might want to buy instead of start a business because it fits your
life circumstances and lifestyle better. Or you might just conclude
that you’re not prepared for the extra stresses that come with a
startup.
Diana Nelson, bought Kazoo & Co.,
a toy store in Denver, a few years ago because it was about the only
kind of business venture that would accommodate her new status as a
divorced mother of a two-year-old and an infant. She had been
considering starting her own business or looking at franchise
opportunities, but a far better option was taking over an existing
business that nicely fit her child-raising needs.
The question of money:
Of course, you’re likely to need more funding up front if you’re
purchasing an existing company rather than starting up your own. You’ll
pay up front for the tangible assets of a business – facilities,
equipment, and customer list – that a startup may be able to compile
and pay for over time. And if the business is already successful,
you’ll have to pay some form of “goodwill,” which essentially amounts
to the financial value of a company’s reputation.
For
even small businesses, this might require you to have funds in the five
or six figures on hand. Few among us have that kind of dough, but that
doesn’t have to be a deal killer.
One way around the problem is to check with the U.S. Small Business Administration, which will guarantee the majority of many loans for acquiring a business
as long as you meet certain criteria. The loans are made through
traditional banks. In fact, in fiscal 2004 alone, the SBA provided
$19.29 billion in loans and other financing for 87,800 small
businesses, up from $15.24 billion for 71,200 small businesses the year
before. Obtaining an SBA loan requires meeting “a whole laundry list of
criteria,” says Parker, “but they are available.”
You
may be able to get the seller’s help in financing the deal, especially
in the very common circumstance that the seller is quite motivated to
dispose of the company. You end up making payments to the previous
owner over time instead of having to come up with all your capital up
front – sort of like a land contract on the purchase of a home.
That’s
what Francis McGuckin did when she sold her accounting firm several
years ago. The buyer paid her $20,000 up front and then made $1,000
payments to her for the next few years until he had paid off the total
purchase price of about $50,000. “It worked out just fine,” says
McGuckin, who now is a business consultant based in Langley, B.C.
Our Bottom Line
Buying
a business may or may not be for you. But you shouldn’t write it off
just because the idea sounds scary. And if you choose the right
business, eureka! – you might just have a vehicle that can take you to
bigger and quicker success as an entrepreneur than a raw startup could.
