Let me share with you a big problem that new business buyers experience when they are buying an existing business.  Most business buyers purchasing business under $10 million use an “asset sale.”  This is a sale of the assets of the business to a new entity or owner.  The new business owner may change the name slightly and continue on the course of doing business; however the vendors and creditors have no history or track record with the “new business.”  Now you and I both know that it’s not really a “new” business – however several creditors will consider it “new.”  The toughest part of this is that the business buyer didn’t know that they would have to either give countless personal guarantees (the vendors consider the business “new,) or pay for several bills in CASH.  Business is not “as usual,” after the business purchase!   

One of my readers ran into this pitfall.  He purchased a business assuming that he was going to be able to work with the previous owners’ relationships with the vendors and creditors.  Within a week after closing EVERY vendor showed up at his door asking for personal guarantees!  They all said that his business was brand new, it had no history or track record, and they would only do business with him if he gave a personal guarantee.  His FICO score dropped like a rock and finally some of the vendors started to refuse to give credit – because his credit was too low!!  Worst of all he had to use precious cash flow to pay the vendors.  Luckily the damage wasn’t permanent. I’m happy to say he’s still in business, however he’s learned an absolutely invaluable lesson about buying a business.

You’ve found the perfect business to buy, obviously the next question is “How much should I Pay?”    Business valuations should give you a general range but the answer to this question is much simpler.  How much is the business worth to you? 

A good friend of mine and private equity coach, Lee Abbott, had the best response I’ve ever heard.  “A good business – a truly good business (meaning well composed processes, accurate and honest financial records, good industry, and great management) has great value.  You can never pay too much for a good business.”

Wow!  You can never pay too much for a good business – then what happens to the vast majority of people who buy businesses (thinking they are good,) and who get great bargains?    Here’s some more sage advice “Cheap Deals are usually cheap for a reason.”  This doesn’t mean just because the seller sells to you at less of a cost that the deal is bad.  Cheap and “good price” are two different things.  Ask my friend Richard Parker – author of “How to Buy a Good Business at a Great Price©,” www.diomo.com . 

Beware of business sellers that are willing to hand over the keys for next to nothing.  An associate of mine made me aware of a tanning salon business here in Denver.  A few years back the sellers began to sell their individual salons to unsuspecting business buyers on great deals for seller financing.  Why?  If the buyer couldn’t keep up with the payments they would merely reposes the equipment and keep the buyer’s down payment.  My friend told me that his brokerage refused to represent the seller after seeing the process happen twice.  He saw business buyers walk in with their life savings only to see it lost in a matter of months.  The buyers were devastated, the sellers had buyers steal equipment, and the business broker’s name was permanently tarnished.  No one wins when the objective is to pull the wool over someone else’s eyes.  Eventually after several lawsuits, theft of equipment issues, and tax issues the seller went out of business.   

Remember, you can never pay too much for a good business and cheap deals are cheap for a reason.

It’s amazing to me how many entrpreneurs beat their head against a wall working on a new venture that will be the next million dollar idea!  I admire people who have the dream and desire to create something new that the world has never seen.  It takes a lot of time and determination to start a business – but most of all it takes a lot of energy and money.  Don’t get me wrong, starting a business CAN be a lucrative venture.  However BUYING a business (the right way) usually IS profitable. 

Here are a few points on why it’s better to buy a business instead of starting one:

1. An existing business can be financially predictable- A business that has been around for at least 2 years has a track record. The future expenses, cost of goods sold, employment expenses should have some correlation to the past years.

2. Financing is more readily available- Banks are strategic betters. They like to “bet” on ventures that are proven instead of new concepts. Statistically businesses that have been profitable for more than two years are going to continue to be profitable – or at least have income.

3. You can replace your income- When you buy a business you can potentially predict replacing your current income. Most business buyers are what I like to call “job buyers.” These are people who are looking to replace their current job with a new income and a new position.

4. An existing business should have sustainability-The businesses should already have existing policies, procedures, and employees. All of these elements will help you to sustain the business without the massive effort of starting a new business.

5. Starting a business takes a lot of energy to start- Starting a business is difficult and people frequently fail due to undercapitalization, poor planning, or misconceptions about owning a business. However, undercapitalization, poor planning and unprepared entrepreneurs are major reason on why business acquisitions fail. The big difference is that for the first year of starting a business you are just starting a business. You have so many things to worry about that you aren’t able to focus on making money. When you buy a business you can use your time effectively.

6. Current economic conditions favor business acquisitions right now but deter business startups- While I write this article we are having major financial issues as a country. Starting a new business today is like starting a new business in the great depression. Buying a business is an excellent time because businesses are selling for the lowest prices they’ve seen in over two decades! That means there is great opportunity for people who are prepared.

Best wishes

Ted E. Sanders

Founder

Can anyone do this?

A friend of mine works in mergers and acquisitions. He called to tell me an interesting story.  Obviously in conveying this story he left out names, and specific information to protect his client. He was putting together a PPM (Private Placement Memorandum) for a gentleman who was buying a group of used car dealerships throughout the southeastern United States.  This entrepreneur was in his mid 50’s and reportedly had finished the 10^th grade before walking out of high school.  The entrepreneur had also declared bankruptcy TWICE in his relatively young life – having his second Chapter 7 discharged recently after a messy divorce.  To make a long story short the entrepreneur has purchased over $10 million dollars of business and assets – not using one penny out of his own pocket!      He leveraged the real estate of the business, and the assets (mostly used cars) to fund the acquisition.  He also engaged the help of a few private investors to make up the difference. 

 So – can anyone do this?  The answer is a resounding “NO.” 

 This entrepreneur was obviously familiar with private equity fund raising and structuring acquisitions. He also knew what he was looking for in a deal. He did have the help of a great attorney and good advisors.

 He did not however have a degree from a big name university, a big pile of cash, great credit, or a home! (Apparently the gentleman has been living in a family member’s spare room.)  

 My friend, the Mergers and Acquisition attorney, – is red with envy!  His exact words were “If this guy can do it why can’t I?”  Obviously I said – you can!