Monster Media 1996 #14/Monster Media No. 14 (April 1996) (Monster Media, Inc.).ISO/business/sba961.zip/F215.SBE

Text File | 1996-01-01 | 8KB | 168 lines

@131 CHAP 3

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          │         BUYING AN EXISTING BUSINESS       │
          └───────────────────────────────────────────┘

PLANNING NOTE FOR @NAME:
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@IF900xx](Your business is already started, so the following discus-
@IF900xx]sion will probably be relevant to you only if you are consi-
@IF900xx]dering starting up or buying a second business.)
@IF901xx]Since you have not started your planned new business yet,
@IF901xx]you still have an opportunity to choose between starting a
@IF901xx]new business from scratch, or acquiring an existing business
@IF901xx]in the @BUSTYPE field.
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If you are going into business for yourself, you have prob-
ably given at least some consideration to buying an exist-
ing business.  It is a possibility you should not overlook,
since doing so can have some considerable advantages over
starting a new business from scratch.  One of the main ad-
vantages, of course, is that buying an already functioning
business gives you a chance to start out with an estab-
lished customer base, which might otherwise take you sever-
al years to create.  Another is that it is sometimes possi-
ble to have the seller stay on as an employee or consultant
for a transitional period, to help familiarize you, the new
owner, with the operation of the business.

         HOW DO YOU FIND A BUSINESS THAT IS FOR SALE?

ADVERTISEMENTS.  Finding a business for sale in almost any
field is usually not very hard.  All you need do is look in
the classified ads in most major newspapers, and you will
find plenty for sale.  Just realize that most of the busi-
nesses that are advertising they are for sale either have
serious problems, or else are being offered at prices that
are out of line with the market, in hopes that someone who
is not too sophisticated will unwittingly buy them out at
a premium.  The trick with all these advertisements is to
separate the wheat from the chaff, which, as usual, means
that "knowledge is power."  Developing the knowledge or in-
formation you need to make an intelligent purchase of an
existing business will generally require you to do two
things:

      (a) a lot of homework, talking to people in the in-
          dustry or in the market area to find out how
          much, realistically, you should be willing to
          pay for a business of the type you are inter-
          ested in (based on its size and profitability);
          and

      (b) a lot of legwork, looking at different candi-
          dates, some of which you will need to explore
          in depth, perhaps getting rather deeply into
          purchase negotiations before you finally real-
          ize you don't want in.  The author and program-
          mer of this program has had clients who have
          actually spent YEARS looking at businesses to
          buy until finding one that was actually a good
          deal (and wound up very happy with the busi-
          nesses they finally bought, incidentally).
          However, you may not have the luxury of wait-
          ing several years till the right deal comes
          along.

BUSINESS BROKERS AND REALTORS.  Often, when you respond to
an ad offering a business for sale, you will find that the
person running the ad is a business broker, rather than the
actual owner.  These brokers, who represent the sellers of
a business, and usually get a commission equal to about 10%
of the sales price, can be very good sources to contact in
your search for a business to buy.  Of course, represent-
ing the seller, they will be seeking to maximize the sale
price, and the seller may also tend to ask a bit more if he
or she knows the broker will be collecting a 10% cut out of
the pie.

LOCAL CHAMBERS OF COMMERCE.  Talk to the people at your lo-
cal Chamber of Commerce.  They usually know a great deal
about the local business community and may be able to give
you some free leads to firms that are for sale, perhaps be-
fore they are formally advertised as being for sale.

ACCOUNTANTS, ATTORNEYS AND BANKERS.  Often these profession-
als can be the best sources of leads to good businesses
that may be coming up for sale, even before they are on the
market.  Many business people tend to confide in their ac-
countants and lawyers about things they would not even tell
their priest or psychiatrist, such as the fact that they
are planning to retire or sell out their business, long
before making any formal plans to put the business up for
sale.  If you have friends who are CPAs, lawyers or ban-
kers, take them to lunch and tell them what you are looking
for.  Typically, they will have a vested interest in find-
ing a friendly buyer for a retiring client's business,
since they will fear losing that account if the client's
firm is sold to strangers who have their own CPA, lawyer
or banker already.

Certified public accountants (CPAs) can be particularly
good sources for leads.  Having been one for most of my
own professional life, I can tell you that every CPA has a
number of clients with "juicy" little businesses that the
CPA occasionally fantasizes about buying if the client ever
dies or decides to sell out....Visions of 6-figure incomes,
heavy cash flow, from a simple little business that only
takes a few days a month to run, waving palm trees in
Tahiti, no more "tax seasons" ....etc., complete the pic-
ture.

But most CPAs (or lawyers or bankers) stick to doing what
they do.  However, if you can find a CPA who is looking for
a partner to go in with him or her in buying out a client's
business, and who would want you to be the person who runs
it day-to-day, with the CPA remaining an investor for the
most part, don't pass up such an opportunity.  In such a
case, you can generally bet that if the CPA is putting up
his own money to buy out a client's business, he has stud-
ied the business carefully for years and feels that it is
a real bonanza.  In short, the accountant will have done
much of the pre-screening for you already in such a case,
on his or her own time.

THE DIRECT APPROACH.  Often, if you see a small business
that you think you might like to buy, the simplest approach
will be to talk to the owner and see if he or she is inter-
ested in selling.  While the owner may have had no serious
thoughts about selling the business before, the appearance
of an interested potential buyer is not only somewhat flat-
tering, but may even cause them to decide to sell out to
you.  Many businesses are bought and sold in just this way
every day.


        ADVANTAGES OF BUYING AN EXISTING A BUSINESS

In addition to the obvious advantages of buying an existing
business that were mentioned above, there are the following:

   .  You may be able to take a regular draw or salary
      out of the business right from the start if it is
      a profitable operation.  This will rarely, if ever,
      be possible in a true start-up situation, unless
      what you are taking out is borrowed money.

   .  Your risk is probably less when you buy an estab-
      lished, profitable business.  You KNOW that it
      has a viable market if it is already profitable.
      Your main risks are that something will change
      (e.g., new competition, obsolescence of product)
      that will adversely affect the business after you
      acquire it.  Or you may simply screw it up.

   .  Simplicity in getting started.  You won't have to
      reinvent the wheel, since an ongoing business will
      already have facilities, operating systems, em-
      ployees, etc.  Thus you can devote most of your
      efforts to maintaining and improving operations,
      rather than worrying about acquiring initial in-
      ventory, setting up accounting systems, finding
      employees, designing a floor plan for the execu-
      tive washroom and the like.