Mission #2-4 Buying A Business

Objectives:

• To evaluate buying a business versus starting a business from scratch.
• To investigate current business for sale in your industry.
• To learn the general criteria for evaluating a business's worth.
• To consider the opportunities of partnership.

Background:

If starting your own business seems like a lot of work and risk, you're right. But, there is a way to cut through a lot of the work and some of the risk. You can buy an existing business. And, so you won't feel alone, over 1,000,000 businesses change hands each year. To breakdown the number of businesses sold, about 50% are food related, 15% are retail businesses, 15% are service businesses and the remaining 20% are mostly in distributing, manufacturing and construction.

Advantages of Buying an Existing Business

• Planning will be minimized.
• The location is known to customers.
• The business may have a solid reputation.
• There is an established customer/client base.
• There is existing inventory and equipment.
• There is a supplier network established.
• There may be experienced employees.
• The business may already be showing a profit.
• The business has a financial history to evaluate.
• An established business is easier to finance.
• The owner may lend all or part of the price at lower rates.
• The seller may become a mentor.
• You may be able to buy the business at a below market price.

To find the disadvantages of buying an existing business, you only have to turn all of the positives above to negatives. The location may be poor. The reputation may be terrible. The existing owner may have a poor credit history with suppliers, and there may be hidden debts which you might have to assume. The business may have proven to be an uncooperative neighbor to other area businesses. The current employees may be of low caliber. The business may be losing large sums of money. Modernizing or remodeling the business may cost more than starting from scratch. The business may be overpriced. The seller may be less than forthright in stating sales figures and expenses and his/her reason for selling.

However, the advantages of buying an existing business outweigh the disadvantages for a conscientious entrepreneur. To be a conscientious entrepreneur means that you have committed yourself to the research time necessary to become an expert in your chosen business field.

To become a world authority on a topic, read forty books on that topic. Is this a lot of work? Yes, so get to work!

You can and will learn much on the job. It's called OJT, or "on the job training." But, as you will see repeated in this course, research is a prerequisite for success. However, the research task is not overwhelming and, for most types of businesses, you can complete the necessary research in months rather than years.

To find businesses for sale, you will consult:

• Other business owners.
• The Internet.
• Newspaper classifieds.
• Industry trade associations and trade publications.
• Industry suppliers.
• Business brokers.
• Real estate brokers.
• Local business organizations, such as the Chamber of Commerce.
• Your own research and inquiry.

If you start to analyze why most small businesses fail, you often would have seen the naiveté and blind optimism of the failed proprietor. He or she dove into a business without first knowing the depth of that business. Their research was poor or non-existent. He or she thought that they could learn the business through a "baptism of fire" or OJT.

"I'm beautiful. I know the cosmetics business." Wrong.

"I'm a good cook. I know the restaurant business." Wrong.

"I'm a good athlete. I know the sporting goods business." Wrong.

Unfortunately most small businesses don't allow a new owner the luxury of easing his or her way into the enterprise. You have to know what you are doing from day one, and from day one you have to hit the ground running. You run or you are run over.

Again, the research necessary to become a reasonable expert in your field is not usually a daunting task. As we saw with Kevin Romano, in four to six months of intense part-time research, Kevin had a good handle on most aspects of the pizza shop business. He also had Uncle Giro and his other mentors for back-up.

You must be an extrovert willing to ask questions and more questions.

You must lead yourself to the answers you need. This is your financial future. You can't be shy. Go for it.

Doing your research and learning about your business should be both fun and exciting. For once, you are researching and doing something exactly for yourself for an exact reason.

You aren't semi-conscious at your desk daydreaming about a better life while somebody else gets ahead.

You aren't stuck in a humdrum job.

You are a warrior and warriors are action oriented.

If doing your research and learning about your business isn't self-motivating, you are in the wrong business.

Remember, the business isn't important. You may be a tennis coach with a tennis school and love your business and be making your million dollars.

With expert knowledge from your research, you will know if Samantha's Dog Grooming Service is worth $3,000, Granny's Candy Cupboard is worth $13,000 or if Dominic's Used Computer Showroom is worth $30,000.

Now, if you are an expert at used computer pricing, you might find that Dominic's business is undervalued at $30,000 because the salvage value of the inventory alone is $40,000. You might also find that Dominic would be willing to accept your offer of $25,000 because Dominic really didn't know what the business was worth in the first place, and because Dominic is anxious to move out of state. The final result would be that you would be buying Dominic's $40,000 business for $25,000. On day one, you would have a going business and $15,000 of added asset value.

You will be an expert at your business. Other people in your industry may or may not be experts. Other people may have been experts years ago but now have been coasting for so long that they don't know everything that they should know. This is human nature. This is them. You are you.

Yes, this is how rich business owners get rich. They recognize opportunity and they take advantage.

Yes, these opportunities do materialize for savvy entrepreneurs willing to put in the study time to find them. Why not you?

Each time you evaluate an existing business, your investigation will include but not be limited to:

If you are conscientious and follow all the advice in this course, in about six months, you will have acquired sufficient expertise to evaluate the worth of most small businesses in your specific field. This is a very important business skill. Buying and selling businesses, expanding businesses in a field in which you have a particular expertise, can be extremely lucrative.

A business is worth what a ready, willing and able buyer is prepared to pay for it. If you are the buyer, it is what you want and not what the seller wants. You must do your research and then arrive at a price when you will walk away.

Granny could be crafty or crazy. She could be a doll or a devil.

You can't change other people. Granny owns the business and she can be as logical or illogical as she wants to be.

You have to figure out what is a good deal for you and make your offers accordingly.

Sometimes you win.

Sometimes you lose.

Stay in the game and wait for the next opportunity.

When you become an expert in your business field, you will have the confidence to make offers that work well for you. Generally, you will determine a price at which you would purchase the business. This price may have something or nothing to do with the asking price.

Obviously, if your opinion of the assessed value of the business is much higher than the asking price, don't delay. You'll want to make an offer immediately that will bind the owner to sell the business to you. Don't get greedy or too demanding with your terms, you might lose the buying opportunity to a faster acting or more reasonable prospect.

However, if your opinion of the assessed value of the business is lower than the asking price, take care. You must have a figure in mind at which price you will buy the business or you will walk. You might want to try a first offer of 20% below your final figure as a means to feel the owner out and obtain more information about the business. You can always raise your offer, as required by the negotiations.

Again, in buying a business, you must be negotiating from a position of strength born of research. If you are following the advice in this course, additionally you will have the counsel of your mentors.

In business sale negotiations, price is but one of many points to consider. The amount of cash involved in the sale and the time required to close the sale are two other very important determinants. If you're a cash buyer who can close the sale quickly, you are negotiating from a position of strength. To get cash and save time, an owner may yield on price. An expert will know where he or she can give and take.

Story:

The Lopez Goff Gallery

All of Ana's efforts were moving forward except for finding a suitable gallery location.

Ana made a business plan from which she estimated monthly gross sales at $8,000 to $10,000. However, after deducting reasonable expenses and the cost of inventory, she would still project a negative monthly cash deficit of $2,000. Not a very good plan for getting rich. Ana either had to find a way to boost projected income or lower anticipated expenses.

Ana spoke with two friends who worked at banks and both agreed: no way could she expect bank financing based on her current business plan. And, no way, was a bank about to invest in a venture without substantial collateral from the borrower. Ana's expertise and enthusiasm were not substitutes for cold hard assets, preferably liquid assets, preferably cash.

Liquid assets are investments that can be turned into cash quickly.

Both bankers agreed that Ana's best bet would be private financing.

They asked Ana if she knew any wealthy collectors, benefactors, philanthropists or billionaires willing to invest venture capital in a prestige business.

Well, through her museum work, of course, Ana did know most of the city's wealthy set. What could she do? Ask them, she supposed, but, quietly.

Ana started reviewing the list of thousands of museum members and drafting a list of contacts. The criteria: first, whom did Ana know on a name basis who might be interested in financially supporting a new gallery and secondly, how could she approach them?

Ana compiled a list of 28 names. These were people with whom she had worked directly on various museum committees and events. All 28 she believed to be wealthy. Ana only has to think of a way to contact them regarding museum business while casually mentioning her gallery plans.

As Ana began to work through the names on her list, most of the replies to her discrete inquiries were, "Well, isn't that nice dear. You'll have to send me an invitation to your opening and be sure to put my name on your mailing list for your shows."

However, persistence and patience paid off for Ana.

If you need or want something, don't presume others know or can guess, just ask. In your life, you have faced many more daunting challenges than a verbal rebuke. If you want it, ask. If you're told "No," then, ask someone else.

"Actually, Sheila, I've already spoken with a broker from Metropolitan and he said that there wasn't any space available and that Sturgess Avenue was probably out of my price range."

Sheila didn't seem to be a woman who heard "No" the first time,

"One of our brokers, turning away business, really? Who did you deal with at Metropolitan?"

Ana felt that she might have spoken out of turn,

"Sheila, I don't want to get anyone in trouble. The broker, I think was Jim Lansing. But frankly, I admit that Mr. Lansing is right in saying that Sturgess Avenue is out of my price range."

Here, the networking spark ignites,

"Well, I'm sure that Mr. Lansing did not realize that you were a friend of Jason and me. I'll have Jason speak with Jim Lansing and see if he can't find something. You can expect a call from Mr. Lansing by week's end. Then, I will expect a call from you telling me how Mr. Lansing has solved your problem. I think your focus on the middle market is well targeted. All of the pricing of art on Sturgess Avenue is really getting out of hand. You can do much better on price in New York and Europe, you know."

For Sheila's help, Ana wanted to give Sheila something back,

"Sheila, as a dealer you can buy art wholesale and ..."

Ana proceeded to educate Sheila on pricing in the art world. And, Sheila, a woman who understood numbers, was impressed. She told Ana,

"Yes, Ana, I'm sure we can work out something exciting. We must have another conversation very soon. When is your day off? We can meet for lunch." An appointment was set for the following week.

Two days following her conversation with Sheila Goff, Ana received a phone call from a new Jim Lansing.

A much more encouraging Jim Lansing was speaking,

"Ms. Lopez, I wish you had told me that you were from the museum and a friend of Mr. Goff's. Anyway, Mrs. Goff has called me and told me that the space must be on Sturgess Avenue. Frankly, I'm calling for your help. We have no storefront space available on Sturgess and I've called the other areas of the city in which you might be interested. I assure you that I am working on your case nearly full time."

"Thank you, Mr. Lansing. I had looked on the East Bank and ..."

For a moment, Mr. Lansing thought he might be getting off the hook,

"Yes, the East Bank might be very suitable."

But, Ana wasn't about to give up on her big chance,

"But, as you know, Sturgess Avenue is the art center of the city. And, I was really hoping for any space with that address. I'm having lunch with Mrs. Goff next Tuesday and I'll ask her advice."

Mr. Lansing backtracked,

"Lunch on Tuesday? Any space with that address ... Well, why don't you call me back Monday? You know, I really don't want you to give up on Sturgess Avenue until I've called every owner on the street. Will you do that? Give me until Monday afternoon."

Ana could afford to be magnanimous, "Certainly, Mr. Lansing."

"Thank you, Ms. Lopez."

Whatever Mrs. Goff said to Mr. Lansing was working. On Monday, Ana called Mr. Lansing as arranged.

The news was encouraging,

"Ms. Lopez. I have something for you on Sturgess and it will suit your budget much better. I called my three building managers on Sturgess and insisted that they inventory every inch of leasable space at the personal request of Mr. Goff. Being a businesswoman, I'm sure you know how it is. Sometimes your managers just need a little prodding. Ha, ha," Mr. Lansing gave a nervous laugh and continued,

"Anyway, in 337 Sturgess, a beautiful building, we have a basement storage area of about 2,500 square feet. At present, the space really isn't anything to look at, of course, pipes and all. But with elbow grease and paint, you might be able to make it into something. The only problem is that the ground entrance opens out in the small parking area on Bowdoin Street. But you would have access from Sturgess. There is a door at the end of the main corridor leading to the space. You'd have to walk down a flight of stairs. But, of course we could see to it that your mailing address and business address would remain Sturgess Avenue."

Ana was certainly interested,

"Well, thank you very much for your help and ingenuity, Mr. Lansing. This space sounds very interesting. How much are you asking for it?"

When you are negotiating are you dealing with a party who is using someone else's funds or their own personal money? There could be a big difference.

"Sheila, I love the basement, thank you. Everything is coming together now, thanks to your help."

Sheila got to her priority,

"Actually, Ana, I want to talk with you about your gallery. Have you considered taking anyone else in with you?"

"Are you offering, Sheila?"

Sheila nodded, "Yes, I guess I am. I'm a workaholic. I love real estate and I love art. The real estate I have. Now, why not get involved in the art business?"

Ana needed to qualify Sheila's intent,

Are you interested in selling in the gallery?

Sheila shook her head,

"Heavens, no. I'm much too busy. We'd have sales people for that. You would be the managing partner and supervise. I could be involved in special events. With my contacts, I'd be very good at arranging the caterers for the shows, for example."

Ana tried to pull back a little, "Well, catering the shows might be outside the budget."

Sheila, however, was practical,

"Yes, well if the show called for cheese and crackers, then I'd be in charge of seeing to it that we had the best cheese and the best crackers."

Ana couldn't argue, "Sheila, if you could find me space on Sturgess Avenue, I have little doubt of your capabilities."

Sheila wasn't one to mince time or words,

"Well, now take my offer seriously. I want to hear from you within a week. And, call Lansing back and tell him that we'd both like to see the "basement" again. This time, we'll go together. That ought to keep him busy. Jim Lansing is in line for a vice-presidency in a year or two. I'm sure he will be quite accommodating."

"And, Mr. Goff...?"

"You just leave Mr. Goff to me. If this venture costs him less than a small fortune, he'll be happy."

Operational Limitations:

• Become an expert at your industry, before trying to buy an existing business.
• Sometimes business are priced by reasoned accounting standards and sometimes business are priced at the whim of the seller. Whim sellers may present no opportunity or an immediate bonanza. A knowledgeable buyer will know the difference.
• If you are planning to leave one job for another, you must walk a diplomatic tightrope. If you plans are disclosed too soon, you may be fired.

Seeds for thought:

• How many businesses are sold each year?
• What is a percentage breakdown of types of businesses sold?
• What are the advantages of buying an existing business?
• What are the disadvantages of buying an existing business?
• What is OJT?
• How much time is necessary to research most industries prior to opening or buying a business?
• What are some sources to find businesses for sale?
• How much time is needed to research most types of businesses?
• Why do small businesses fail?
• How important is an "address" to a business like Ana's?
• How was Ana able to find a partner for her business?
• Why was Mr. Lansing so much more accommodating the second time around?

Jargon:

Asset value - Anything owned that has worth.

Baptism of fire - Learning by being thrown into a situation, ready or not.

Bring to the table - What you have to offer.

Caveat Emptor - "Let the Buyer Beware." As a buyer, it is your obligation to know a good deal from a bad deal.

Collateral - Items offered as security against a debt.

Don't make waves - Don't disagree, go along with the program.

Liability - Money owed.

Liquid assets - Cash, or other items easily converted to cash.

OJT - "On the job Training." Learning the job by doing the job.

Management - People who make the decisions and supervises an operation to ensure that the owners' business objectives are met.

Managing partner - The person who makes the decisions and supervise the operations of a partnership.

Prospect - To seek customers.

Salvage value - The estimated value of property after a person is finished with it.

Shoestring - Starting with a small amount of money

Value - The worth of all rights arising from ownership.

Question and Answers

Could you explain the different stages of business development?

In stage number one, you simply try to give yourself a job. In stage two, you build that job into a thriving business. In stage number three, you build the business into a valuable company that you can sell and retire from. One of the greatest advantages of being the boss is that stage three doesn't have to happen when you are 65, 70, or 75. Stage three can happen when you are 50, 40, 35, or even younger. You can retire from business development and concentrate on personal development.

What's the best form of advertising?

Testimonials. Word-of-mouth or buzz from your customers who have used and appreciate your product or service is your best source of advertising and, best of all, it's free. So, don't be shy.

If you provide maid service, you should be doing the best cleaning job you can at every home. Since your excellence will often be recognized, ask for the testimonial and then put the testimonial into all your other advertising. Also, when you're complimented, remember to ask for more business. Can the homeowner recommend you to a neighbor? Does the homeowner's spouse use a cleaning service at his or her office? Is the homeowner aware of the other services that your company offers besides cleaning?

You build a large successful business, one satisfied customer at a time.

Don't most small businesses fail?

No, most small businesses succeed.

Only a small percentage, between 2% and 3% of existing small businesses, close each year. And, of this small number, only 20% can be considered failures with the business closing with unpaid debts.

There can be many reasons for business failure, ranging from undercapitalization to over-expectation. Most new business owners that fail simply did not do adequate research. If you expect to run a successful business for the next fifteen or twenty years, then asking you to do six months of research before you open shouldn't be a hardship.

Action Plan:

• To further you knowledge of your industry, look for businesses in your field that are for sale. Check all sources online and offline.
• Go to Blog Search on Google and find blogs that are related to your fields of interest.

Support:

• Small Business Trends
• Is4Profit
• The Center For Business Planning
• The Business Plan Archive

Inspirational Insights: