Buying an Existing Business

Buying an Existing Business:

Pitfalls & Pointers

BILL SEAGRAVES

So you're considering buying an existing business.

First of all, congratulations! This is a big step, and by many accounts, a smart decision.

Why?

Let me start with a few of the advantages (perceived and actual) to buying an existing business: ? Risk: There is less risk involved when purchasing

an existing business vs. going out on a limb and launching your own startup business. ? Cash Flow: Logically, in buying an existing business, you'll be inheriting an existing cash flow and therefore can skip the normal ramp-up time most new businesses require. ? Funding: It's often easier to get approved for a loan because of the business' proven track record to turn a profit.

These advantages aside, there are still many things that should be considered when you're making the decision to purchase an existing business. Here are a few pointers to make buying an existing business easier for you.

My Pointers

1. Work with a Business Broker

Many people think they want to buy an existing business but have no idea where to look or how to get the process started. A business broker is an excellent resource to help you identify businesses for sale in your area.

That said, not all business brokers are created equal. Just like when you're hiring, say, a service contractor for your home, get two or three "bids." And don't necessarily let price be your determining factor--thoroughly interview each broker, ask for their references and actually call those references.

Even if you think you've already identified the business you'd like to buy, it never hurts to get the opinion of a local expert in your desired area. Take your time and do the research. Let me repeat this part: take your time. Better to invest time and money now than to deal with surprises down the line.

2. Find Out Why the Owner is Selling

When investigating a business, it pays to pay attention to why the owner is selling. Why do they want out? Some people may be forthcoming with this information e.g. they are retiring to Florida to be near their grandkids, or maybe they hurt their back and can no longer do the required work. Other times you may get an evasive "I'm ready to move on." The latter suggests there may be an underlying problem.

Dig a little deeper by researching the state of the industry--is it a novelty or a trend that could be on its way out and the owner wants to jump ship just in time? Perhaps the business deals with technology. We all know how rapidly technology changes and perhaps the seller doesn't want to, or doesn't know how to keep up. Do your research, but go with your gut.

If you are not buying into a declining industry and you believe you can do a better job of adjusting to change and growing a business...then an existing business with a great upside might be perfect for you.

? 2013 CatchFire Funding Incorporated All rights reserved. Edition 130722

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3. Research the Competition

In doing your research on the industry as a whole, research and speak with your competitors. Ask about their pains and challenges. Would these be the same for you?

As a business owner--in any industry--you will be expected to consistently improve and adjust with time. No business can stay the same forever. Are you prepared to do the things required to stay consistently ahead of your competition?

4. Check with the BBB

No matter how much rapport or perceived trust you may have with the seller, checking the status of your prospective business with the Better Business Bureau is always a good idea. Are there complaints? Was the company ever involved in a lawsuit?

Also, read all the online reviews you can find. It's nearly a guarantee that an existing business will come to you with its reputation included-- whether that reputation is good or bad. Either way, you need to know its existing perception within the community.

Finding the Perfect Business--Things to Ask Yourself

? Are you looking for a fixer?upper or something that's move-in ready? In other words, do you want something you can turnaround and sell for a profit or do you want something you can build for the long term (and then sell for a profit)?

? Why do you want to buy this business (what's your motivation)? Think about the end before you begin and plan for your exit strategy up front.

? Do you need a specialty broker and realtor? Those who have expertise in marketing and business positioning can help you avoid costly mistakes down the road.

? 2013 CatchFire Funding Incorporated All rights reserved. Edition 130722

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The Pitfalls

For every advantage, there may be possible drawbacks. Here are a few of the most common issues my clients run into--sometimes they are red flags, and other times, they are just things for which you should be prepared.

1. Calculation of Business Valuation

Business valuation is a necessary part of any buying/selling process, however, I list it as a pitfall because there are always two perspectives to business valuation--that of the owner and that of the bank.

Often times, the seller will value their business at a higher number than a bank will (after all, this business could have been their life's passion so they likely have figured in some emotional value). My point is, before you make a decision to move forward or not, make sure you have a bank's valuation complete. The bank provides the impartial estimation figuring in the appropriate sales multiple and contingency dollars.

2. Owner Being Key to Business

If the business you're looking to buy is named after the owner himself, it could be a red flag. If the success of the business has stood alone on the name without the actual owner being involved at every turn, the name could be viewed as equity.

However, if the owner has been the key to attracting business all these years--or is the only one with the required knowledge or skillset--once they're gone so too could go the credibility of the business.

If there is a key employee that is staying on when you take over--an employee that customers are used to dealing with--this could be a big advantage during the transition of ownership.

3. Inherited Employees

Directly related to the key employee mentioned above, it's a good idea to get a non-compete in place to protect yourself where all employees are concerned. While there is little you can do about the owner running off and starting a competitive business (other than doing your homework about his intentions) you can prevent him from taking all of his employees with him--at least for the life of the non-compete clause you put in place.

? 2013 CatchFire Funding Incorporated All rights reserved. Edition 130722

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