Buying a Business Can Be Smart Business (If You Don’t Mess Up)

by Vincent King · 4 comments

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?

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  • fredjohnson says:

    I did both in my life. I started a small business and then 15 years later I bought a small business. I still have both. They both ended up being decently successful. I went from making around $10k a year in salary when I first started to around $1 million a year in salary today. The businesses gross around $5 million a year now. At times I had doubts I would reach my financial goals, but I kept the faith. Worked pretty hard. Many 100 hour weeks of work over the years. Here’s what’s strange—-today I work about 20 hrs a week and make $1 million a year. Back when I worked 100 hr weeks I made $50k a year. Hopefully that’s what will happen for you.

  • BrokersWiki says:

    Well, I have sold online business about a year ago and today I regret it. It was bringing me steady monthly income, but now I have to build the new site from the beginning. Obviousely companies buying online businesess know very well what they are doing.

  • Mannix says:

    Buying a business and to make it successful is not as easy as it sounds, many serious elements are involved from planning to implementing. I tried it and made the mistakes and pit falls that I was warned about.

    First and foremost prepare yourself for the commitment, ask yourself if you are ready because the road is long and the stumbling blocks are many.

  • Garrett says:

    Buying a business is one of the few things I’ve never tried in my business career. I’ve built from scratch, I’ve licensed some materials from another business, I’ve franchised with royalties paid (but zero up-front costs), but I’ve never actually straight out bought a business.

    As my cash reserves increase though it’s definitely something that’s in my mind. The big thing for me is still number one, does it fit me. I have yet to find anything that is worth the money out in terms of what I want to actually manage, and that’s even before looking at the dollars and cents of it.

    So I guess for now I am going to continue building my own but this gives some things to think about in terms of when the time inevitably comes.

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