Q. Many entrepreneurs choose to buy an existing business as opposed to starting from scratch. What are some of the reasons that someone would want to do that?
A: Basically buying a business or owning a business has always been the American dream. There are three ways of going into business.
- Starting from scratch – This is the most difficult and comes with the highest risk. However, starting from scratch gives the highest rewards if you're a true entrepreneur. Basically you're starting off with no customers and no business - that's something you have to overcome.
- Buying a franchise - There are good franchises and there are bad franchises. You have to really differentiate and do your homework to find out what is a good franchise. You will not get any current numbers or numbers of existing franchises as far as what volume they're doing, what profits they're making. They're not allowed to do that so you have to do your due diligence by contacting different franchisees of that franchise to determine whether this is something you really want to go into.
- Buying an existing business – This is probably the least risky if you buy the right business and do it properly because you have immediate cash flow. Buying a franchise or starting from scratch you don't have that advantage. All of the bugs of the business have probably been ironed out and all of the problems that the business has encountered at the early stage of their development have been resolved. Basically, most of the dirty work has been done when you buy an existing business. To me that's the most advantageous way of doing it and the least risky. Again, if you do it properly.
Q. Do you also think it may be the least expensive?
A: It could be but maybe not. It depends on the size of the business and it depends on how you buy it. You can buy a business for all cash which I don't recommend or you can buy a business with a down payment and most business owners will do financing. If the business owner does financing a bank will also come aboard if you need additional financing. It really depends on the size of the business. Again, it could be expensive but maybe not because again you're getting that instant cash flow.
Q: What are the characteristics of a typical buyer? Where do they come from? What are they looking for?
A: A typical buyer has always dreamed of owning their own business. They may be working or not working or they could be a displaced executive who can't find a job. Some former business owners will also look for other opportunities. Sometimes they're burned out in their existing business and are looking for new challenges.
There are turnaround specialists who look for businesses with problems that they feel they can turn around.
There are also strategic buyers, usually a company, looking for a business that will fit in with their overall business plan.
Q: Let's assume that you're ready to buy a business. How do you find the right business to buy? Where do you look? Who do you go to?
A: There are websites you can go to for this information. For example BizBuySell.com and BusinessesForSale.com where you can just type in a state or city and the type of business you want and you can choose from a list of available businesses.
I think the best way of doing it is to contact a business broker, who has specific listings and can help you in the buying process of buying a business. Some of the due diligence has been done by this business broker already so you’ll have some basic information that you can review.
Q: What are the major steps to take in buying a business?
A: The first thing to do is to find a business whose price, requirements, down payments and terms fit your needs. That's most important.
Q: Let's say you find a business. You like the business. It looks like it makes sense for you. How do you make an offer?
A: Before you make an offer, you certainly want some financial information. Then usually, a broker will have that information on hand which will give you an idea as to what the gross sales have been over the past few years, what the net profit has been over the past few years. This is very helpful information to know before you make an offer.
Usually you will come up with an offer to purchase which is contingent upon you doing due diligence.
Q: What does due diligence involve?
A: It involves a lot of things. First, you’ll want to collect a projected financial statement for the following year and statements for the previous years. These are profit and loss statements that you can look at to determine the profit business. Make sure to verify these numbers. Examine at least the last three years of tax returns to see what has been reported to the government.
You should also look at bank statements and the customer list. Verify everything that's been represented to you by the business broker or the seller. You want to make sure that everything is exactly as it's been reported to you.
Listen to the podcast to hear more information on making the purchase decision, tax implications, other people that should be involved in the buying process, and more.
About the Podcast Guest: Norm Silverstein
Norm Silverstein whose primary expertise is assisting buyers and sellers of small to mid-sized businesses. Norm has owned his own business brokerage company for 10 years and merged with another company in 2006. Having completed hundreds of business sales and transactions, Norm is experienced in mergers and acquisitions, business valuations, performing due diligence, determining the real cash flow of a business, and everything that it takes to bring buyers and sellers to the closing table. Norm has been a SCORE certified mentor since 2012.