Buying a Business - Part 2 of 3
The first step involved doing a thorough self-examination to verify being a business owner is truly the right choice for you, and how to get the help you need if you have reason to believe you wouldn’t make a perfect business owner.
The second step is choosing the right business sector based on current market conditions as well as your own preferences and goals. In Part 2, we’ll be diving into actually choosing a business, setting up a winning business plan, and obtaining optimal financing.
You can find Part 1 here and Part 3 here.
Finding a Business for Sale
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| Vincent Murphy Business Broker |
First, consider your pricing parameters. Look at the average market value of the type of business you are interested in, then consider variable factors like location and profitability. If you’ve done your homework, you may even be able to take a guess as to the direction of the market and future profitability. You should also have an idea of the degree of risk and uncertainty.
Now that you know how much you are willing to pay for a business, it’s time to find specific businesses to target for purchase. Pinpoint the geographical area where you want to own a business, and research businesses that are currently for sale. You can learn about potential sales through networking with other business owners and professional contacts. Investigate why the business is for sale.
Check local business and industry publications for a list of businesses for sale. Review newspapers, general classified advertising sites like Craigslist and other online listings. Run your own ad describing what you are looking for in a potential business. There are even websites dedicated to business sales which provide search features to find exactly what you are looking for.
Remember that just because a business is not listed somewhere doesn’t mean it is not for sale. The best business for you may be the one that isn’t necessarily for sale. Almost every business is for sale at a given time, for the right buyer and the right price. If the business you want isn’t actively being sold, see if you can acquire it.
Talk to the owner personally or make contact through a representative like a broker or a lawyer. The best approach will depend on the company and the industry. Having a conversation with the owner could provide some insight that will influence your level of interest. A personal connection could also help to demonstrate your intentions to the current owner. If someone has worked hard to build a business over the years, they may want reassurance that the business will continue in the same fashion. Even if the owner wasn’t necessarily thinking of selling, the right offer and promise the business will be in good hands could change that.
Going through a business broker is another way to find businesses for sale. Brokers are typically hired by sellers to find buyers and help negotiate deals. Brokers charge a commission, usually 5 to 10 percent of the purchase price, but their experience can be valuable. Many first-time buyers say the assistance a broker can provide through the buying process, especially negotiation, is worth the cost.
Make sure to do your homework on the broker. Confirm he or she is a Certified Business Intermediary (CBI), which is the gold standard in the business brokerage world. Broker candidates should also be a member of the International Business Brokers Association and have several years of experience. Additionally, ask the broker for references.
For more tips on choosing the right business for sale, read this.
Stand Out with Your Business Plan
- 35% of survey respondents planning to buy a business this year feel it’s currently a buyer’s market.
- 71% of current or potential business owners are optimistic about the U.S. economy
Whether you use a broker or go it alone, you want to put your best foot forward to the seller. That typically will be projected in the form of your business plan. A good plan defines the company’s mission and goals, new ownership objectives, sales focus, market, strategy, management team, and financials.
Since you are buying an existing business, you have an advantage in that you have a history of the current business. Start with the information you get from the current owner. Use their business plan as a platform to launch yours.
However, be cautious. The current owner’s plan may be designed to sell the business and may downplay any business problems. Compare the seller’s plan for the business with past financial information, market data from objective sources and whatever other reality checks you can come up with. Spend time at the business, talking to both customers and employees. Talk to suppliers and vendors as well. Check the businesses status in the Better Business Bureau, industry associations and licensing and credit-reporting agencies to ensure there are no complaints against the business.
Understanding the current customer base is extremely important for someone considering buying another business. Are the customers satisfied? Are they loyal to the current owner? This could be a problem is you are considering purchasing a family business, a business in a small town, or sometimes, both.
One of the biggest advantages to buying over starting a business is the existing business’s potential. Perhaps you see growth opportunities the current owner doesn’t. You’ll know what’s worked in the past as far as advertising, personnel, and procedures based on the performance of the business. Perhaps you see some areas that with some changes can improve profitability.
Compare growth forecasts of the business to past results. If it appears as if the seller is being too optimistic, ask why. If the business is for sale yet has healthy sales projections, there could be another good reason for the current owner to sell such as retirement, health problems, divorce, needing capital, desire to seek new opportunities, etc. Try to understand why the business is being sold and how this affects your own vision for the business.
Raising Money to Buy
- 46% of survey respondents said the difficulty of getting traditional loans is affecting their decision to buy a business.
- 30% of survey respondents paid less than $100K for their business. Another 30% paid between $100K - $250K for their business.
- 55% of survey respondents who bought a business in 2014 paid 5% of the list price.
- 89% are pleased with the purchase price.
Once you’ve set your sights on your dream business, you will need to finance the purchase. There are generally two different types of financing to pursue:
Debt Financing
You can borrow money from an outside source, usually a bank, with an agreement to repay the loan with interest. You could also arrange for private loans from friends or family or even angel investors.
Sometimes, it’s necessary to take drastic measures like Dwight Milko, who owns six ReMax franchise locations in the eastern suburbs of the Cleveland, Ohio area, had to do. The housing crash made getting financing impossible for Milko, so he had to do “a no-no by every financial advisor out there” and cash out his 401K to get capital for his business. That motivated him to set goals to break even as soon as possible. “My goal was to break even within a year so that I could replenish that cash outflow that I had to lay out personally. I set expectations for myself and tried to reach them so I can have some breathing room,” said Milko.
Equity Financing
Instead of going into debt, you can agree to sell stock or shares of your business to outside investors. This lets you avoid taking out loans, but you will be giving up partial ownership of your business and in some cases, control. No matter which type of financing you choose, you will need to bring something to the table as collateral and that could be as much as 50 to 70 percent of the selling price.
Seller Financing
This is an option where the seller waits a period of time to be paid off. But it comes at a price. Seller financing can add anywhere from 5 to 25 percent of the asking price because a seller will usually lend at higher rates than a bank would. However, there’s a level of security in these types of arrangements since the seller will have a stake in the continued profitability of the business.
The seller needs to have confidence in the buyer in order to make this arrangement work. In fact, the primary reason sellers shy away from offering terms is their fear that the buyer will be unsuccessful. If the buyer can’t make the payments, the seller would be forced to either take back the business or forfeit the balance of the note.
But seller financing can be worth the risk to the seller even if it doesn’t get cash up front. Not only can the seller command a much higher price and get higher interest rates, but offering seller financing greatly increases the chance the business will sell.
There are many ways to structure the sale that makes sense for both buyer and seller. This is an area where a business broker can be of help.
Regardless of what route you choose, getting financing to buy a business requires you to have your financial status organized and secure.
You will often be required to show your:
- Business Plan
- Revenue Projections
- Bank Accounts and Statements, for both yourself and the business you are purchasing
- Asset & Liability Statement, which is a detail of what you own such as the equity in your home and what you owe like credit card debt.
- Valuation, which is evidence of the value of the business you are buying from a professional accountant or valuation expert.
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