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Steps to Buying a Business

There’s a lot to be said for not starting from scratch and buying a company that is already established with a track record.

Global Influencer

Global Influencer
Global Influencer

All the talk these days is about startups and having a fast exit but there are many other ways to get into business. Startups just get all the press.

You can start a business from scratch, buy a franchise or buy someone else’s business. I guess you could also inherit a business but that’s another article. There’s a lot to be said for not starting from scratch and buying a company that is already established with a track record. Buying a turnkey operation has lots of positive aspects to it as long as you do your due diligence to find any downside.

Buying the established business means you will have avoided the angst and ups and downs associated with the startup process. The seller has already paid the price for their entry into business and you’re on the verge of reaping the rewards of their hard work. However, you will pay a price for their hard work.

Shopping for a Business

The first thing to do is to identify the industry you want to enter. Unless you have a passion for the business it may become a weight around your neck down the road, so choose wisely. Consider the type of lifestyle associated with this company you finally decide on. If you’re looking at buying a janitorial company, be prepared to work nights that might be a problem if you are married with small kids. A client bought a coffee shop because she ‘thought it would be easy’ but didn’t really like dealing with the public.

The other lifestyle question will be can the revenue from the business support your existing lifestyle? My janitorial client has a difficult time making more than an average living while effectively giving up his social life. He is unhappily ‘self-employed’ with a mediocre wage.

Learn Your Chosen Business

Once you have chosen a business, research it like your life depended on it. What kinds of revenues do others like it bring in? Is the competition fierce or non-existent for the business? What stage is the business in meaning is it still in a growth stage or is it in a mature cycle that could use a fresh approach?

Some people will actually go to their competition to ‘scout’ out the operation and try to get a feel for how they are doing. I have a much better approach and I have used it extensively. I call a similar business in another part of the province, state or country and ask for help. I first started doing this back when video stores were everywhere. A client asked me to help setup the store and the idea came to me that people like to talk about themselves so why not ask another storeowner who had nothing to lose. I called a video owner 300 miles away and told him about my client. Because we weren’t competition he spilled the beans about everything. He ended up saying if I paid for his hotel and airfare he would come to our store over a weekend and show us how it’s done. Unbelievable! We took the guy up on his offer, the store was a roaring success and the gentleman from a distant town became a long-time friend.

What’s It Worth to You?

After you have determined what businesses are selling for in your sector then you must come up with some sort of offer to reflect your research. Hopefully you are buying a business that is advertised for sale rather a cold call so you know what the ‘ask’ is. When you are making your offer consider that there is more than just inventory and infrastructure that goes into a price. The term ‘goodwill’ is the intangibles of a company. Investopedia defines goodwill as “the value of a company’s brand name, solid customer base, good customer relations, good employee relations and any patents or proprietary technology.

Image via dat’/Flickr CC

Gut Check Time

The next step is to decide if this is really for you. You will need to do a few reality checks along the way so be ready for them. After all the lifestyle questions, the financial risks and the research, are you up for buying and running a business with people’s lives in the balance? After all, employees usually come with the purchase of a company so you do in fact have their livelihood in your hands. Then there is the gut feeling. Do you have a good feeling about this purchase and have you asked family and friends for their feedback?

Is This Really Right for You?

After asking your family and friends for advice (be ready for a mixed bag of answers) talk to a lawyer and accountant to review possible problems and determine the best financial options for you. While your family and friends should be consulted be aware that having your friends on board is a major hurdle you need to overcome. As I have said many times, having entrepreneurs as friends is really good because if you need to work on a project or a last minute deal they will understand and won’t give you a hard time if you have to miss that special party or hockey game.

How Are You Going to Pay for It?

If you have survived now it’s time to arrange financing. You will need to figure out what the transition costs needed to take over the company. Do you need to allocate money for improvements, renegotiating a lease or other problems that may pop up out of nowhere? Be prepared. Get the financing in place before you make an offer on a business just as you would arrange a mortgage if you were purchasing a home. There is nothing worse than having several meetings only to find that no one will loan you the money to buy the thing.

Hit the Books

We’re not there yet so hang on. Once you have gotten pre-approved for money don’t rush out and start negotiating. You need to do your ‘due diligence’. This covers your butt In our case we may take months for due diligence. This is when you look at the right set of books (not everyone is honest) and an income statement for at least the last 12 months. Consider both ‘hard’ and ‘soft’ due diligence. Hard meaning the traditional stuff like the books, costs, structures, taxes, etc. while ‘soft’ refers to the study of the company culture, leadership and other human elements. It’s not simply a case of ‘running the numbers’.

The Art of the Deal

The final step after deciding that the company makes good business-sense to purchase you then begin negotiations. Some people are good at it but it’s a scenario that can cost you dearly. Take your bean counter with you or a mentor so you don’t enter the fray without support. Unless you record the negotiation you will surely miss something. Keep you head and understand that this is about give and take and some people are better at it than others. When you shake hands at the end celebrate – you are now a business owner.

The thing to remember through the entire process is that this is what you have decided you want and it’s your future. Taking the correct steps to purchasing an existing company will pave the way for a more than average chance of success in running your new enterprise – good luck!

Stories like Charlie Munger’s inspire me. It shows why you must live life as an optimist.