Tuesday, November 18, 2014

Buying a Business — Part 1

When it comes to buying an existing business, there are pros and cons.

If you buy right, for example, you can significantly reduce start-up costs. On the other hand, if you pay top dollar when purchasing an established and reputable business, the cost may be a lot higher than starting one from scratch. You have to decide which is which.

After looking at what's being offered locally and in surrounding areas, it became obvious that most asking prices are arbitrary and in several cases, unrealistic. So when I saw an ad for a local business being offered for sale—with a more than reasonable asking price—I was intrigued and felt the need to investigate further.

As you can imagine, there are many ways to value a small business. You can use the Cash Flow method, which basically allows you to determine how much of a loaned amount the cash flow of the business will support. In other words, you measure the ability of the business to service debt.

You can also use the Tangible and Intangible Assets approach, where you make a decision based on a comparison of buying similar assets to those being offered as part of the sale. Basically do the math on how much it would take for you to create an enterprise of the same value.

In my case, using the latter method, made the decision-making process a lot easier.

After a couple of phone conversations with the business broker, I made an appointment to go visit the business to have  a look, meet the owner, and learn more about the company.

The first thing I thought, is that having a one-way 40-minute commute can be a deal-breaker, at least for me, but after seeing the facilities and talking to the seller, I came to the conclusion that 40 minutes of mostly highway driving are not that bad after all. Besides, I can always relocate the business sometime in the future.

Another plus for going ahead with this deal is the fact that, because of the nature of the business, competition is very limited, compared to other venues such as retail, for example. That's very appealing to me since I did not want to invest in a type of business where I would have to compete with everyone and their brother, which usually results in a price-cutting war that yields no winners.

So the pro in this case—at least in my opinion—is that there's manufacturing involved. I am totally aware that manufacturing anything creates its own set of challenges, but I truly consider it more of a positive than a negative factor.

After gathering some basic details, I contacted my attorney, as well as my CPA, to discuss this potential purchase, and so far, it all looks okay in order to keep moving forward with the project. My CPA gave me some valuable tips on what to get from the seller or agent in order to perform a thorough due diligence.

Time is always of the essence when it comes to making these types of acquisitions, so you must have a good reliable team supporting you, in order to make the process efficient and as painless as possible.

There's no specific formula on how to buy an existing small business. Every transaction will be a bit (or a lot) different than the next, so you'll have to rely on the seller, the business broker, your CPA, your attorney, and your gut in order to make the final decision. This last one may sound a bit hokey, but don't discount it as such. Of course if the numbers don't make any sense, I would advise you to use your head and common sense, regardless of what your gut may be telling you.

So far my research tells me that this opportunity is a good one, and after talking with both my attorney and accountant, I submitted a Letter of Intent, along with the required small deposit, to get things rolling.

After deciding against buying a franchise business, this approach is definitely the right one for me, so I am very excited at the prospect of getting back in the entrepreneurial game.