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Text File | 1996-08-23 | 8KB | 164 lines

@131 CHAP 3

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

PLANNING NOTE FOR @NAME:
-----------------------------------------------------------
@IF900xx](Your business is already started, so the following discussion
@IF900xx]will probably be relevant to you only if you are considering
@IF900xx]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
probably given at least some consideration to buying an
existing 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 advantages, of course, is that buying an
already functioning business gives you a chance to start
out with an established customer base, which might otherwise
take you several years to create.  Another is that it is
sometimes possible 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
businesses 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 information 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
          industry 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 interested
          in (based on its size and profitability); and

      (b) a lot of legwork, looking at different candidates,
          some of which you will need to explore in depth,
          perhaps getting rather deeply into purchase
          negotiations before you finally realize you don't
          want in.  The author 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 businesses they finally bought, not too
          surprisingly).  However, you may not have the
          luxury of waiting several years till the right
          deal comes along, particularly if you are one of
          the millions of refugees from large corporations
          that have "downsized" you out of a job.

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, representing
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
local 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
before they are formally advertised as being for sale.

ACCOUNTANTS, ATTORNEYS AND BANKERS.  Often these professionals
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 accountants 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 bankers, take them to lunch
and tell them what you are looking for.  Typically, they will
have a vested interest in finding 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
picture.

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 studied
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
interested 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 flattering, 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 often less when you buy an established,
      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, employees,
      etc.  Thus you can devote most of your efforts to
      maintaining and improving operations, rather than
      worrying about acquiring initial inventory, setting
      up accounting systems, finding employees, designing
      a floor plan for the executive washroom and the like.