27 Aug Succeed now: Why you should buy a business versus starting from nothing or buying a franchise
Succeed now: Why you should buy a business versus starting from nothing or buying a franchise
If you are looking to be your own boss through business ownership there are several avenues that you can pursue to reach your goal. Typically people consider one of three routes: starting up a business from scratch, buying a franchise, or acquiring an existing business. Quite often people don’t even realize that they can buy a business. There are many challenges to acquiring a business but if done successfully, it can be one of the greatest ways to make great money in the short run and have control over growing your investment in the long run.
Buy a business
Both startups and franchises typically require a great deal of upfront money, a great deal of planning, and a long time frame before they are truly generating a profit. While some franchises and startup businesses begin to make money early on, we’ve spoken to many who, even after five years or more, have never made a profit and have been losing money since inception.
At a recent roundtable event in front of career professionals who were considering going into business for themselves, one of the trusted accountants speaking there stated that when helping her clients create proforma profit and loss projections for the business plans, she typically did not project profitability until after the third year.
Business acquisitions on the other hand can provide immediate income upon you taking over. There is still a great deal of planning and upfront work that needs to be done when acquiring a business, but there are many benefits to acquiring an existing business. That is if you choose the proper existing business for you.
Not all of the existing businesses have terrific records. And not all are truly profitable. To begin with, one must have a common understanding of what is meant by profitability. Owner benefit, sellers discretionary earnings (SDE) or adjusted net generally refers to the amount of money that a single owner who actively manages the business on a full-time basis could take home yearly.
Hire an accountant
While accountants arrange tax returns so that business owners can show a small bottom line and hence pay the minimum taxes legally, determining owner benefit or SDE often requires adding back optional deductions that are used to minimize net profit of the business. It is important to do this consistently when comparing different businesses so that you can make a fair and accurate decision on the quantitative aspects of the business. Not everyone who wants to sell a business makes this easy for the buyer. Get help from your accountant, attorney, and business broker.
Understand how much the business owner is making.
A copy of the formula that we use to determine sellers discretionary earnings or SDE, can be found on our website, BuyBizUSA.com. However, your accountant is probably also well aware of calculating this factor.
Besides the quantitative aspects of the business, you will also need to scrutinize the qualitative aspects of any particular business that you are considering. Have the sales been going up or down over the last few years? How likely will the business run without a hick-up if a new owner takes over? Is a new competition coming into the marketplace? Does anyone particular customer make up a significant portion of the profitability of the business? Will the seller sign and abide by a good non-compete clause?
There are many more questions, but the essential question you must always ask is whether this business is a good fit for your skillset and passion points?
Many people who are contemplating business ownership have developed a vast array of transferable skills. Open your mind to consider many types of businesses you can run. Time and time again I hear people come to us with incredible backgrounds who have narrowed down their options to a very limited number of businesses, such as restaurants and gas stations because they think they are easy businesses.
A real case example
One of our most wonderful clients, Mike, came to us with exactly that type of thinking. As we got to know him, we realized he had a masters degree in business, years of experience in manufacturing, and a whole lot of great transferable skills in terms of leadership, financial analysis, and management. We introduced Mike to someone wanting to sell a plumbing company. Mike initially believed that since he had no experience in plumbing, such a highly technical business was definitely not a possibility.
Mike came to realize that he had a great set of skills that allowed him to be a great leader, a great business development person, and the great manager who took the business and significantly increased its profitability in the first year. He did so well that after few a years he decided to buy an air conditioning company. He is not a plumber, and he is not an air conditioning mechanic. But he is a successful business leader who now enjoys running his own great company.
Check the records
When you buy a business that has been in operation for many years, if the records are good, and your credit is reasonable, and you can show that you are likely to be a good leader of the business you wish to acquire, you may be able to get an SBA loan. That means you can buy an existing business for 20% down, and sometimes as low as 15% or 10% down depending on the bank and the circumstances. An experienced business broker can provide a good list of banks that are actively working with the SBA program
Legacy Investor Parity (LIP)
Small business loans allow individuals to attain Legacy Investment Parity (LIP). LIP allows you to invest a certain amount, such as $100,000, and after paying all expenses, including paying the banknote, the business will provide at least that initial investment amount, which in this example means you can take home $100,000, an annual SDE. While only a very small amount of businesses (less than 7.5% on our last survey) that are on the marketplace can provide this type of return, they are certainly worth taking a closer look at.
What is very important though, is that you find a business that you can truly be passionate about. It’s easier to grow an average business into a great one if you can be passionate about it than it is to maintain profitability on a business that you really do not enjoy on a day-to-day basis.
Do your research
Most importantly, do your research! Consider your skillset. Seek the advice of friends and advisers. Open your mind to different options. Look for LIP. Conduct a detailed and professional due diligence on any investment that you are considering. Find something you can be truly passionate about.
Buy a business based on potential, but
Lastly, keep this last Legacy Tip in mind. “Buy a business based on potential, but pay based on performance.” Only buy a business you believe you can improve and grow. And never overpay for that opportunity. Opportunities are relative to the buyer so just because someone you know thinks a particular business is a winner or a loser, you need to decide for yourself in the end. What might be a terrible investment for one person, can be a great opportunity for another. When you find something you can be passionate about, go for it.
Good luck on your venture to great business.
“Buy a business, Begin a Dream, Sell a business, Share a Legacy.”