Mike

A: As a general rule, buying a business can be a very good idea, but as with everything else in this economy, to make sure it will be a successful venture, you have to proceed with caution and do your due diligence.

First the pros: With a pre-existing business, you should have a pretty good idea of what you are getting. The business makes X number of dollars in profit a year, has Y number of customers, and so on. The kinks should mostly be ironed out and the brand is already established. All good, that.

There are two potential pitfalls, as I see it:

1.      First, you have to make sure that the success of the business is not due to the current owner. If the customers, for instance, are his personally and not really those of the business, that is a red flag.

2.      Similarly, you need to be extra certain, given the economic times we are in, that the business will remain as profitable as it has been in the last few years.

When it comes to buying a business, there are few people more knowledgably about the process – selecting, financing, etc. – than the folks over at BizBuySell.com. The site is one of the top marketplaces for businesses and franchises for sale. It lists everything from inexpensive home-based businesses to gas stations, large ventures, franchises, and more.

So to better answer your question, I called up Mike Handelsman, the general manager of BizBuySell.com and spoke with him.

Like any good business coach, he thinks you need to begin with the basics: “Start with a self analysis, decide what you are good at, figure out whether you are an entrepreneur (aside: The Small Business Bible can help with that!), and then start thinking about the sort of business that fits your interests and affords you the right type of income.”

Once you pass that self-analysis test, then it’s time to start digging in. BizBuySell.com for instance, allows you to find all sorts of businesses for sale in your area. You can see how much they are going for and what other requirements may be needed.

Once you start to really get serious, Handlesman suggests that you check into hiring a business broker, for several reasons.

·        First, good brokers will help you make a smart decision.

·        They also know what is for sale in your area.

·        They will help you with loan options. And finally, and importantly,

·        They are paid by the seller, not the buyer.

When I asked Mike Handlesman if it is possible to buy a business with no money down, that is, with 100% seller financing, he answered that is possible, but it won’t be easy, noting, “Most sellers have been waiting for 20 years to retire and won’t want to wait longer to cash out.” But you never know; you just might find someone willing to help you get started if they see that you will be able to pay them off in a few years.

“But remember, the danger of finding a seller willing to do 100% financing is that the business may not be very viable.”

Rather, he noted, partial seller financing is far more commonplace, and likely to happen. In fact, Handlesman noted, “if you have some money, or some financing lined up, it’s a buyer’s market. There are distress sales out there.”

If you want full or partial seller financing, the expert gave these tips:

·        “Show that you have a high likelihood of success” – you have experience, contacts, etc.

·        “Offer aggressive terms” – a 3 year note, that sort of thing.

·        “Work with a broker.”

·        “Engage the seller as a consultant for six to 12 months” – that way, you up their income.

Buying a business, especially with some seller financing, is another option in this challenging economy.

Today’s Tip: Want to find a broker, or get the value of a business? BizBuySell helps with those too. Steve says check it out.

Here are seven tips that can help as you research the perfect existing business to purchase:

1) When buying a business, you are not only buying a lifestyle, you are buying the livelihood that comes with it. More specifically, you are not only purchasing the assets, inventories and assuming the lease. You are also buying a job and hoping for a good return on your investment. It is wise to carefully and realistically determine what you can expect from the business in return for your hard work; not only a return on investment, but also a salary.

2) Look for a business where the seller is willing to finance part or all of the purchase. Starting a business can be difficult to obtain the capital needed in order to properly run the business and still afford to live. Banks are not always willing to loan money to small businesses, particularly those that do not have a successful history or track record.

Additionally, it is not uncommon for banks to require a 30% down payment. If the seller is willing to finance the sale with a low down payment of 20% or less, the seller is letting you know that they not only have faith in the continuance of the business, but also in you as the new owner.

3) If you do not have your own business broker and are only working through the seller’s business broker, it is vitally important that you remember that the business broker works for the seller. This is not to say that the broker will be dishonest, but their business obligations lie with the seller. You must not lose sight of that.

4) It is highly advisable to hire your own professional advice resource, such as an attorney or accountant. This is important if you decide that you do not want to work with the business broker. They will be working for you and advising of any potential legal or financial issues that could arise from the purchase.

5) Work into the agreement that the final price includes customer retention. In many service-related businesses, a large portion of the business you are buying is the relationship of the existing customers. Often times, the agreed upon price for the business will include some or the entire existing client base. Also keep in mind that should the customer base drop after you have taken over the business after a certain period of time, that a drop in the sales price would occur.

6) Agree to have the seller stay for an agreed amount of time as a consultant. This time could be anywhere from a couple of weeks to several months. This is highly recommended where there is a large customer base. The importance of this is that the seller would act as a liaison for helping you to meet or consult the customers.

Additionally, if there is a clause of a reduction in price should existing customers leave after a pre-determined time; this could act as an incentive for the seller to work with you to ensure that they do not lose money either.

7) Do not rely on the word of the seller or his/her broker. Do your own research and valuation on the business. Even if you are working with a business broker, this is their job to value businesses; however, this may be your first and only purchase of a business. Having as much knowledge about the business and the process will be immeasurable in helping you be successful.