You go to work every day. You sit in your cubicle and answer to your boss, swearing at yourself the entire time he’s talking, knowing you belong anywhere but there. You know you have the potential to be so much more.
One day you’ll open your own business and prove it to everyone.
But when will that happen, and what will it be? You’ve always wanted to be a business owner. An entrepreneur’s blood pumps through your veins. But starting out on your own takes time and effort you don’t have. Giving up your day job isn’t an option — since dreams don’t buy milk.
So the dreams keep getting shoved to the back of your mind. Even if you don’t have time to birth your own dream, however, you could adopt one that’s already been born.
Rather than starting a business and working from the ground up, you can take the shorter route by buying an already established business. Be careful, though: even a business with positive cash flow can be a risky opportunity.
You’ve toyed with the idea before, but you worked so hard to save for retirement, and you’re dubious that tossing it all on a not-so-safe bet is the best idea. The money’s in your hand, and it would be foolish to buy just any business and hope you’ll profit with more than your investment.
Without proper guidance, that could be exactly what you’re doing. The following three guidelines will help you make an intelligently calculated decision.
1. Make sure the business fits you
Does the business you’re considering fit neatly with your background, passion, and current finances? A former burger flipper doesn’t have the background knowledge to open a restaurant. A former tutor doesn’t have the necessary information to open a branch of the Sylvan Learning Center.
Take the knowledge you do have, combine it with a passion for that field, and you give yourself a head start with your business venture. Without passion, it’ll be difficult to sustain the natural enthusiasm it takes to make good business great.
Whether starting fresh or buying an existing business, you’re in for many long days filled with hard work. Passion will keep you happy.
But keep in mind that without finances in place, you and your business might be doomed. Know how much you can afford to go into debt for your business before buying. $500,000 of debt for a business whose doors could close at any time isn’t financially sound. However, if this business can be viably brought back to life, it might be the right investment for you. Just know what you’re getting yourself into by weighing the risk that you might be wrong.
2. Think about dollars and sense
Financials can be scary. Taking over a business can be a long, involved process. Much of this has to do with the financials. You must be able to answer the following questions when considering your finances.
1. Do you have a down payment available? Most purchases will require a sizable down payment. Do you have access to the asking amount?
2. What’s the source of your down payment? Are you paying cash? Borrowing the full amount? Are family members gifting it to you, or do they expect a share of the profits if you make it?
3. What are your additional sources of funding? Many people liquidate everything they own (insurance policies, retirements, stocks, etc) to continue funding their venture. Will you be one of them? Are you taking out a business loan? Your local Small Business Administration can help you find out if your venture can qualify. This is less risky than liquidation.
4. Will you ask for seller financing? Many owners agree to owner financing. This extends the life of their income, rather than opting for a lump sum. This also helps you if you can’t get a small business loan.
5. Do you have a statement of personal net worth and a resume? This is especially necessary if you’re buying a franchise. The corporation sponsoring the business wants to make sure you can deliver on their name.
All of this means nothing if you’re buying a business that has no value.
3. Assess its value
Even if you’ve taken the steps to secure a loan or liquidate your life, it amounts to zero if that’s what the business is worth. Ask these questions to assess the value of your purchase.
1. Can I see your books? Thoroughly audit the company’s books to determine cash-flow. This comes from pretax earnings combined with the owner’s salary, interest expenses, discretionary expenses, and non-cash expenses (like depreciation). Is there a negative cash flow?
2. Why are you selling? Not that you expect the owner to deliver a completely honest answer, but you can ask them anyway — along with others who know the business, like realtors and local professionals. These answers, plus their books, can give you a clearer picture. If the business is failing, that doesn’t mean stay away. You may be able to revive it with new and fresh ideas.
3. What’s included in the price? A woman in our town bought a “business” from a local man, and was quite surprised when the landlord came looking for his money. She was under the impression that she had paid for the building as part of the sale. In reality, she only paid for some equipment. Don’t be afraid to ask what exactly is included in the price.
Knowing where your money will come from and what value the business has can help you determine if you’re getting a great deal or biting off far more than you can chew.
Have you bought a business, or are you thinking about acquiring one? How was your experience?