There’s more than one way to succeed as an entrepreneur. Beyond starting up a business – witness our brand name! – you might be able to buy an existing business instead.
And in case you’ve dismissed the idea of buying a business because of the up-front money it requires – the same money you already blew on your brand new car – think again. With some creative financing ideas, you might be surprised what you can afford.
Here’s some vital info about choosing a business to buy and whether it’s for you:
The business is a known quantity: The best argument for buying an existing business is, well – that it’s an existing business. In other words, it’s got a book of customers, a name or brand, probably some physical assets, relationships with vendors, likely a line of credit, an established market, some experienced employees, and all the other things that a startup lacks. It’s the basic idea behind a franchise opportunity as well.
“It’s also much easier to value an established business than a sheer concept, because you have data to work with,” says Rita Gunther McGrath, an associate professor at Columbia Business School and co-author of MarketBusters: 40 Strategic Moves that Drive Exceptional Business Growth.
You might be asking the obvious: If a business is any good, why on earth would it be for sale? “Death, divorce, illness, retirement of the owner – those are the most common reasons,” says Richard Parker, president of DIOMO Corp., a Ft. Lauderdale, Fla.-based consulting company. “You also get people who are just plain bored with doing it anymore, or they have other opportunities. The average business turns over every five years.”
“Succeeding in buying a business is a matter of solid research, realistic assumptions, and an unemotional strategy,” says Jim Chamberlain, a retired business owner who advises Orange County, Calif., entrepreneurs as a member of the Service Corps of Retired Executives. If you do get emotional about choosing a business, you might also find yourself overpaying or overlooking fundamental flaws that are too difficult to fix under your ownership.
Re-energizing a tired business: Let’s face it, some businesses slow down or start running on neutral. In those cases, the best business to start may be one that you can quickly transform by fuel-injecting it with your energy, capability and creativity.
That’s what Dan Brady did when he and his father and brother bought out existing Mail Boxes Etc. (now “The UPS Store”) franchises in and around Philadelphia after learning that starting fresh can be much more risky. “Everybody wants a new house!” Brady says. “But we’ve learned over time: If you buy a tired pre-existing location with an existing customer base and cash flow, and infuse it with operational smarts and great execution, the rate at which you can grow positive cash flow and your odds of success go way up as compared to starting the whole thing from scratch.” (Check out the Brady’s key move in seizing this franchise opportunity.)
This strategy could work best for you even if you believe that no existing company does what you want to do with your business idea. “When someone says to us, ‘I’ve got an idea to revolutionize’ whatever, they say they’ve got experience going for them,” says Ted Leverette, president of Partner On-Call Network, a North Palm Beach, Fla.-based consultant to business buyers. “But we say: ‘You’re fooling yourself. Let’s go buy an established company in the field but one that’s troubled. Then you can revolutionize that product or process.”
A business that fits with your place in life: You might want to buy instead of start a business because it fits your life circumstances and lifestyle better. Or you might just conclude that you’re not prepared for the extra stresses that come with a startup.
Diana Nelson, bought Kazoo & Co., a toy store in Denver, a few years ago because it was about the only kind of business venture that would accommodate her new status as a divorced mother of a two-year-old and an infant. She had been considering starting her own business or looking at franchise opportunities, but a far better option was taking over an existing business that nicely fit her child-raising needs.
The question of money: Of course, you’re likely to need more funding up front if you’re purchasing an existing company rather than starting up your own. You’ll pay up front for the tangible assets of a business – facilities, equipment, and customer list – that a startup may be able to compile and pay for over time. And if the business is already successful, you’ll have to pay some form of “goodwill,” which essentially amounts to the financial value of a company’s reputation.
For even small businesses, this might require you to have funds in the five or six figures on hand. Few among us have that kind of dough, but that doesn’t have to be a deal killer.
One way around the problem is to check with the U.S. Small Business Administration, which will guarantee the majority of many loans for acquiring a business as long as you meet certain criteria. The loans are made through traditional banks. In fact, in fiscal 2004 alone, the SBA provided $19.29 billion in loans and other financing for 87,800 small businesses, up from $15.24 billion for 71,200 small businesses the year before. Obtaining an SBA loan requires meeting “a whole laundry list of criteria,” says Parker, “but they are available.”
You may be able to get the seller’s help in financing the deal, especially in the very common circumstance that the seller is quite motivated to dispose of the company. You end up making payments to the previous owner over time instead of having to come up with all your capital up front – sort of like a land contract on the purchase of a home.
That’s what Francis McGuckin did when she sold her accounting firm several years ago. The buyer paid her $20,000 up front and then made $1,000 payments to her for the next few years until he had paid off the total purchase price of about $50,000. “It worked out just fine,” says McGuckin, who now is a business consultant based in Langley, B.C.
Our Bottom Line: Buying a business may or may not be for you. But you shouldn’t write it off just because the idea sounds scary. And if you choose the right business, eureka! – you might just have a vehicle that can take you to bigger and quicker success as an entrepreneur than a raw startup could.
Author The Sloan Brothers
Jeff and Richard Sloan have an intense passion for entrepreneurship and the lifestyle of running your own business. They’ve been involved in entrepreneurship all their lives. As teenagers, they bought and sold HUD houses. As young adults, they started and sold one of the world’s leading Arabian horse breeding operations, and bought, grew and sold a consumer products import company. True to their innovative thinking and boundless energy they went on to become inventors of patented products that have been licensed and commercialized by Fortune 500 companies (including the Battery Buddy®, which prevents car batteries from dying).