Many of us have felt the ... pull of running our own business at one time or another. The allure of being your own boss can be really strong, and it’s no wonder. Small business ... a
Many of us have felt the entrepreneurial pull of running our own business at one time or another. The allure of being your own boss can be really strong, and it’s no wonder. Small business ownership and its operation has proven to be one of the most financially rewarding pursuits that you can follow.
But, it can also be very frightening for those just starting out! We’ve all heard about the high mortality rates for new business ownership; 50% won’t make it through the first three years. There are many reasons for this. Wouldn’t it be great if the potential problems could be eliminated for you as a new business operator? Well, they can!
Buy an existing profitable business instead of trying to start one from scratch! There are three key advantages to this:
Existing successful businesses have a proven track record of profits that will most likely continue long after the business sale. Now you get to apply your new ideas, expertise, and renewed energy to take the business to even higher profitability.
You’ll have established customers for immediate cash flow. No suffering through a long start-up period where you struggle to attract customers to your business. Use these customers as building blocks for future growth.
Typically, you’ll be able to use a business seller’s financing of a large portion of the purchase price to maximize your buying potential.
There’s no question that the success rate for new business owners that have purchased an existing business is much higher than for those who start a newly formed business. This is because an existing profitable business has already proven that it’s successful.
However, the actual process of purchasing an operating business can be a challenging undertaking and you’ll want to be fully prepared. You need to gather as much information as possible which will help you to; find a suitable business for sale, value the business, arrange financing, conduct negotiations, and finally, to actually close the deal and transfer ownership.
The first step in this process is to find out if you’re truly fully motivated to operate a small business (whether you start it or buy it). Ask yourself:
Do I know what kind of business you want to buy?
Am I technically qualified and experienced enough to run the business?
Am I prepared to “eat, sleep, and drink” the business 24-hours a day?
Next, you need to determine what your key reason is for buying and operating a business:
Buying a job to earn a living or making an investment.
Buying prestige (many business owners are respected community leaders).
Seeking self-fulfillment and control of your own destiny.
There are many sources of businesses for sale and quite a few businesses can be relocated. The Internet is one good source but you should start with the business brokers who serve your area. You will find them in the phone book yellow pages.
Now that you know what your motivations are for buying a business and where to find a good company for sale, you’ll need to have some idea about how to apply a realistic value to the company. This isn’t easy! Remember, the seller will want as much as they can get, and you’ll want to pay as little as possible. The key is to strike a fair deal.
There are many other issues associated with valuing a business which are beyond the scope of this article and a prospective buyer is advised to read as much information on this topic as possible. Before you actually proceed with a purchase you should seek the advice and guidance of competent professionals.
Next, you’ll need to start thinking about how you’ll pay for this business. This also becomes an integral part of the negotiation process to arrive at a selling price. There are actually many sources of financing available to the purchaser of a business and frequently the buyer will use more than one of these sources:
Buyer's Personal Capital
Business Seller Financing
U.S. Small Business Administration (SBA)
Commercial Bank Loan
In almost all sales of small businesses, there is some amount of seller financing. This amount can range from 50% to 75% of the total purchase price. In most situations, a seller wants to receive as much money up-front as they can, while a buyer will want to pay out as little as possible.
Once you’ve completed negotiating the selling price for the business, the next step is to finalize the sale, take possession of the business, and begin operations. Closing the deal is the hardest to accomplish, but usually the shortest part of buying a business. After all, the valuations, due diligence, and negotiations are complete and now it’s a matter of getting everything into writing.
The best situation for all parties is to follow an orderly process that will move things along in a business-like manner. The major elements of the purchase and sale process are:
Binder and Earnest Money Agreement
Purchase and Sale Agreement
Closing (at which actual title and ownership is conveyed)
The Closing date and place are set to everyone’s convenience and all of the pre-closing tasks are assigned to the various parties for completion. At the Closing, the actual legal instruments of transfer are signed, money and/or promissory notes are exchanged, and the buyer becomes the new owner of the business.
Well, that’s a snapshot of what it takes to buy an existing business. As involved as it may seem, it’s far less trouble than starting a new business, faster, and certainly less risky. If you have an entrepreneurial mind-set and would like to consider getting into business for yourself, even if it’s only a home-based business, I strongly urge you to consider buying an existing profitable business. There’s tens of thousands of them out there right now just looking for a new owner.
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