If you’ve decided that buying a business is the path that you should take to become a profitable entrepreneur but don’t know quite where to start, this article is for you.
Note: If you need more information about why you should buy a business instead of starting a business, check out our article covering the 5 reasons you should not start a business.
To get started down this path, which we highly recommend, you need to prepare properly. We cover several preparation steps in great detail in our 8-step Acquisition Guidebook, available here, and we also discuss these and more in our free “Buy a Business Support Forum” here, but I am going to cover the most important ones in this post as well.
1) Get the “buy-in” from your spouse if you have one
Buying a business is going to take some time, and you want your spouse to be aware and supportive of it. Not to mention that if you are looking to move from a job to owning your own business, that’s a somewhat dramatic life shift…. he or she needs to be on board with it, or it will not work.
2) Learn the basics
a. Take time to learn about business fundamentals!
b. Read up on topics like entrepreneurship, management, sales, marketing, personnel development, and small business finance.
c. It is also important to learn and understand the terminology used by your advisors, bankers, business brokers, and potential sellers.
You can learn most of these terms and concepts in our Guidebook here, as we cover many of them in great detail plus provide a comprehensive glossary of terms at the end. The good news here is that this step won’t stall your progress. You can brush up on business education at the same time as many of the other early tasks, and keep the ball rolling.
3) Get your personal finances in order
a. Know what you have – This means putting together at least a basic personal financial statement. The banks, and possibly even sellers will want this regardless. however, it’s extremely helpful to you even before that, as it allows you to have a firm understanding of where you are and what you can afford to purchase. Personal Financial Statement forms are readily available on the net with a quick google search.
b. Start improving your credit score. We’ve all had a problem or two when it comes to our credit, so this is the time to get those cleaned up as best you can. Anything on your score that you believe can be explained well, gather the documentation and write up a brief summary that you can quickly give to any potential lender throughout this process.
c. Start saving your money – cash is king in the business world. Any expenses that you have the ability to cut back on to stow away a little extra cash will be helpful…the more you have as a potential down payment, the higher end business you will be able to buy, and the more serious sellers/brokers will take you.
4) Determine what you are looking for
This is extremely important and is likely one of the first questions that a business broker will ask you. And if you don’t have an answer your meeting will not go well. This doesn’t mean that you have to have it narrowed down to the exact business at the exact address…but some basic criteria will be extremely helpful, if not mandatory in most cases.
Here are the criteria that we recommend you consider when evaluating what you are looking for:
1) Type of Business
Examples include manufacturing, retail, restaurant, information technology, professional services, residential services…etc. You can also narrow down even further if you have a particular specialty, such as fast food restaurants (maybe you are currently a manager of a fast food restaurant and ready to take the leap to owning your own), a plumbing company, or an accounting firm.
It’s worth noting that you don’t have to be overly narrow here either. I have often gone into a meeting with several options on the table ranging from manufacturing to commercial services to information technology. You don’t want it to be so broad that the broker thinks you really have no idea what you want, but if you make it clear that, for example, you are looking for a well-managed company in a few different sectors with strong cash flow (as an example), there’s nothing wrong with that.
Which brings us to the next criteria.
2) Size of the company
This should typically be presented in terms of net profit, cash flow, purchase price or a combination thereof. For example, you could determine that you want a company with net profit of at least $200,000 per year. You could also add to it that you want the price to be $600,000 or less.
Be reasonable here. Don’t go in asking for a company that profits $500,000 per year and an asking price of $600,000…. it’s not going to happen and you’ll be wasting your time and theirs. (If some of this is confusing, you may want to check out our 8-step guidebook here, and/or join our free business buying support forum here.
You also don’t want to go in looking for a company that you clearly can’t afford. Don’t ask for a $2M company if you only have $10,000 to your name. There are companies that you can buy with $10,000, and there are ways to keep your down payment extremely low (or even zero), but to get things started, your available cash has to be in range of the company value.
A good rule of thumb would be to look for a company with a value as much as 10X your available cash. So, for example, if you have $30,000 available, you should be able to buy a company worth as much as $300,000 if you use the right strategies and negotiate accordingly. Again, you may be able to actually pay even less cash out of pocket by the time the deal closes, but this is a good starting point to actually get you there (this makes more sense as well if you have a chance to read our Acquisition guidebook)
Fairly straightforward here. Make sure you know the location that you want your business to be located. For example, you may want to be within a 30-mile radius of Denver, Colorado. Or perhaps you just want to stay within your general region, which may be the northern half of your state. I recommend that you do not limit yourself too much here, but at the same time you don’t want to waste time looking at a business that you would never be happy owning because of it’s location.
Decide whether or not you want to personally run the company (be the manager) or if you want to buy a company with existing management in place.
5) Cash Available
This ties into #2, but is also extremely important on its own. Every broker is going to ask you this, but even if they didn’t…you need to know it. How much of your personal money are you willing to use to invest into your acquisition? This doesn’t necessarily have to be just money sitting in your checking or savings account. Perhaps you have a stock market account that you are willing to cash out of, or even a 401k that you want to move some money out of for this acquisition (see our article on using 401k money to buy a business without penalty.
In other words, take a look at your personal financial statement (preparation above) and determine how much of that you are comfortable parting with to acquire a business.
Again, there are several other preparation tasks covered in detail in our 8-step acquisition guidebook, but these are the most important and will get you well on your way.
To get more details on every step of Business Acquisition, including the next step…finding the best buying opportunities, please feel free to check out our comprehensive guidebook here, and also join our Buy a Business Support Forum for free here at www.facebook.com/groups/buyabusiness/.