For many people, buying an existing business sounds easier than starting one from scratch. When you buy a business it is already established. It has an existing customer base and built-in cash flow.
It sounds like the perfect answer to all your problems. No more 9 to 5. No more working for someone else. No more rat race. No more layoffs.
But, before you rush in and buy an existing business you have to make sure that the business you buy is right for you and that youíre right for the business. Otherwise, those old problems can become even bigger headaches: No boss means no regular paycheck. That 9 a.m. to 5 p.m. workday can be replaced by a 5 a.m. to midnight shift, seven days a week. Layoffs or downsizing can be replaced with the scramble to meet the monthly payroll.
The upside is that if you choose the best business for you, and if know the secrets of handling the purchase the right way, you can enjoy the pleasures and the profits of being your own boss without having to go through the groundwork process of actually building it from scratch.
If you seriously want to buy a business, you have to ask yourself, "What kind of business is right for me? For example, should it be a one-person operation? Perhaps, if you really like working alone. But a lot of people who take the one-person route find the work excessively demanding, the silence deafening, and the loneliness disheartening.
Before you decide to buy a business, you should go through several important exercises. First, find out what size business you can afford. In making that determination, understand that most small businesses donít sell for cash. Many people purchase businesses only to find out later that they paid too much.
There is a key rule of thumb to remember when youíre buying a business; the rule of two-thirds. This rule states that a businessí cash flow must service debt totaling two-thirds of the sales price. In other words, any business you buy must have enough cash flow so that after paying expenses, including your salary enough is left over to meet debt payments.
When you find out how much cash you have to invest in a business, multiply it by three. That will give you a rough dollar estimate of how much you can pay for a business. How do you find out how much cash you have to invest?
First, subtract your liabilities (mortgage, debts, etc.) from you assets (cash, securities, real estate, home equities, automobiles, etc.) The number you come up with will be your net worth.
Then, youíll have to determine how much of your assets are liquid; either cash or, as with stocks and bonds, quickly convertible into cash. That will show you how much you can put down on a business. But before you rush out and buy a business, you need to make sure you possess some very important personal qualities such as, being goal oriented, persistent, independent, profit-focused, self-confident, risk-oriented, self disciplined, street-smart, and opportunistic.
The next think you need to do is to determine what kind of business is best for you. To do this, make up a list of your business "wants" and "donít wants." For example, how do your feel about travel? About commuting? About hiring, firing, and managing employees? About long hours? About dealing directly with customers?
Imagine your perfect job. Concentrate on your thoughts and activities, and not so much on responsibilities. Write down your thoughts and images as fast as they occur. A few days later, visualize another, different ideal job. And then repeat this exercise.
In analyzing your perfect jobs, you will probably find that they have a definite pattern, one that will indicate your interests. This analysis will help you find a business whose needs match with what you like to do. Thatís vitally important, because for your business to succeed, it will require that you possess specific skills.
Once you know the type of business you want to buy and have identified your specific skills, you need to decide if you would have to move the existing business. For example, itís hard to relocate a retail business because their success is often tied to location and loyal customers. But for most other businesses, location is not as important. You need to ask yourself the following questions: Would a move result in cost reductions? Would a move result in a better labor market? Would a move result in a better business climate or a better economy?
Lifestyle is a very important factor in deciding whether or not to buy a business. After all, a primary reason youíre buying a business is to improve the quality of your life. But remember that running a small business will probably require long hours and impose stresses on your family. You need to determine how owning a specific business will affect your life and your familyís happiness.
To do this you need to construct a lifestyle profile by asking yourself some questions. First, ask what your business and personal reasons are for buying a particular business; second, ask how your business ownership will affect your familyís lives; third, ask how it will affect your leisure time; fourth, ask what the longer-term lifestyle consequences will be; and fifth, ask how a possible business failure would affect you and your loved ones.
Another critical consideration for you is money. This involves finding out how important it is for you to hear the cash register ring. How much income do you need to be successful, secure, and happy? Will the business youíre buying really provide what you need?
All these exercises may seem overly time-consuming and too focused on personality rather than on the numbers. But the truth is that your personality makes an enormous difference in whether or not you will be successful as a business owner.
Itís critically important to look as closely at your own strengths and weaknesses as at those of the business youíre considering. The alternative is to leave your business career and your personal happiness to emotion, snap decisions, and chance. Itís better to wait a little longer until you find the right business to buy, rather than commit yourself to one that will feel wrong every day you go to work.
Even people who make a serious determination that owning a small business is right for them often run into trouble. In fact, studies show that of those who seriously look for a high-profit small business, only one person in four finds one. The secret is to look for your future business in the right places. And thatís usually not in the "Business Opportunity" section of the newspaper, which advertises more "lemons" and "plums."
One place you might look is at a business brokerage firm. But you should know that your odds of landing your ideal business through a broker are no less risky than flipping a coin. Some brokerage firms seem to peddle a lot more dogs than diamonds in the rough. In contrast, other brokers concentrate on solid, profitable businesses. But their commissions depend on getting the highest price possible, so theyíre in the sellerís corner, not yours.
The truth is that most of the small businesses you would want to buy are located in the hidden market. How do you tap into that market? By bypassing the middlemen, and going directly to small business owners. You can find them by doing the following:
First, spend an orientation day at your local library and identify and become familiar with research sources. Second, decide on an industry or two to target. Third, use directories to find companies that are possibilities for you. Two good places to start are "The Guide to American Directories" and "Directories in Print," which identify regional and state directories that profile different companies. Fourth, create a research worksheet for each company youíre interested in. List the company name, address, phone number, president or owners, industry, products and services, number of employees, sales, and other data.
As you continue to gather information, youíll be able to discard some companies and upgrade the most promising ones. When you have a solid list of promising small businesses that you're interested in buying, you will be ready for a crucial step: contacting the owners which we will cover in part 2.