Tips on Buying a Business

You can get good tips on buying a business as well as a strategy on buying a business from a variety of resources. Lawyers and accountants like to give advice in this arena, but they really are not a good resource unless they have also been personally involved in purchasing their own business. Your best bet is to get this information from those truly experienced in this venue.

I am here to give you my tips on buying a business and a success strategy on buying a business from start to finish. All based on my experience as a seasoned business owner, operator, buyer and seller. In addition, I have helped hundreds of business owners realize their entrepreneurial dreams as an advisor and a broker to them.

Many people think that buying, or even starting, a business is purely based on being in an industry that you love. Although that’s a very good idea to start with, it won’t pay the bills. Below are a few simple things to think about while making your strategy for buying a business. These thoughts will be the key to being a good business buyer and subsequently a good business owner.

Tips on Buying a Business- What Kind of Business Should I Buy?

You need to decide what kind of business you want to be in. At least whittle it down to two types as part of your strategy on buying a business. If you don’t, a few things will happen.

First, you will be looking for a long time in a very wide circle. It is hard to get a grasp on a good business opportunity when you have no idea where you want to be. If you are all over the place, you are not ready to buy a business. In turn, no one will want to deal with you including lawyers, accountants, advisors, brokers and even sellers.

Focus on what you do well.  If making food is your strength, then you want to find a business that allows you to do that. Everything else like sales, marketing, finances etc. should have an employee or outside person to help or completely do those other functions. If you get too involved in things you do not do well or just too many things in general, the business will suffer and in turn, so will you.

Tips on Buying a Business- Do I Need a Partner?

Partners are necessary for two things. Either they will supply you with capital or they will provide you with skills you may not have. The latter is a better reason for a partner and a combination may work as long as you are going in with an even money 50-50 deal or better yet, you own a majority. I don’t recommend picking a partner based on their bank account. You will most likely have major problems within 12-18 months. Trust me, I’ve been there.

Regardless, if a partner is needed, you have to get a partner agreement made up before buying the business. If not, when the partnership sours, you will have no way out or no way to get rid of your partner. Now you are dealing with dead weight dragging you and the business down.

Have a backup team in place. This group or individual should be available to help you out if the business does not come with the right employees to cover your weak points.  This individual or team is best to be a business advisor or a small group of small business savvy people to be your brain trust while you are getting your bearings. Backup people will save you the embarrassment of taking a great business purchase and tanking it very quickly.

Tips on Buying a Business- What Kind of Buyer Am I?

In my experience, there are three main types of true buyers: those that look only for high cash flow, those that look for decent positive cash flow with the thought of using their experience to grow the business, and those I like to call bottom feeders.

Bottom feeders like to look for sellers in a really bad position such as fighting partners (see step 2), or negative cash flow due to an inexperienced owner. These are perfect to scoop up for next to nothing because the sellers not only want to get out, but they need to get out.

Knowing which type of buyer you are will narrow down your focus later on in the process when you are actually looking for a business to buy. It will also start to paint a picture of how much money you will need to make a purchase that is suitable to your "buyer type".

I should point out that if these are “true” buyers, then there are also “false” buyers. These people are either the unprepared and uncommitted buyer that I am trying to not let you be or they are just looking for information. This means either they already have a business and they are trying to scope out competitor info to help them or they are prepping to start a business from scratch and could use the information to help them get a leg up in the process.

Tips on Buying a Business- How Am I Going to Pay for This?

Please don’t make the mistake of thinking that because you are buying an existing business that a bank is just going to hand over the money.  Even if the business is doing extremely well, this most likely will not happen. It is true that buying a solid business with strong cash flow will help, but the business type, collateral, length of time in business and your background are very significant. Of course, the down payment you can provide is also a factor.

And no, you can’t just apply for an SBA loan. These are not easy to get and yes you do have to pay them back. The government isn’t that nice. Again, business type, your personal collateral and a lot of other factors determine this loan process. Normally, this is not the fastest way to get a loan either.

The most likely ways you will fund a purchase are with your own money (including property equity, savings, etc.), non-traditional lenders and/or seller financing.

In addition to paying for the business, you need to determine how much excess capital you may need. You will most likely need some cushion money.  Yes, buying a business gives you a running start, but it’s very likely that you won’t be running on a smooth track for the first few months after the transition from the seller.

Tips on Buying a Business- What Can I Afford?

Usually the cash flow of the business is the best indicator to use for valuing a business. It's also a good way to determine what you can afford when combined with how you will fund the business.

The business cash flow is what you will be using to pay off a loan or return your personal money used for the purchase back into your pocket.  For instance, say a business has a $100k cash flow and you buy it for $200K with 50k down.  That means you have a note for $150k. Say that the note has a 2 year time frame with no interest from the seller. That means you will be paying out $75k a year for two years. Can you survive personally on $25k or less a year for 2 years? Don’t forget that things will probably slip a little when you take over and that you may need additional capital as is often the case. Do you have enough in the bank to handle this for 2 years?>

Determine how much excess capital you may need upfront and not when the problems arise. Yes, buying a business gives you a running start, but it’s very likely that you won’t be running on a smooth track for the first few months after the transition from the seller.

Tips on Buying a Business- Am I Really Ready to Buy?

You will be wasting a lot of your time, seller time and broker time if you are not absolutely sure you are ready to do this. In addition, you will waste money if you get an advisor involved to help you determine if this business is a fit and worth purchasing without being mentally ready and committed. As far as tips on buying a business go, I highly recommend getting the help of an advisor or a broker.

Believe me when I tell you that a seller or broker is not going to give you much financial and business information unless you are committed enough in the buying process. An uncommitted buyer is very easy to spot, especially to a business broker and eventually, a seller will catch on too.

Tips on Buying a Business- Now You Can Safely Start to Look

Above are quick tips on buying a business to prepare yourself for the adventure.  The entire phase is a little more involved than what the tips have described, but this should point you in the right direction. The next phase in the process is finding businesses that fit your criteria.