Guide to Buying a Business
Have you thought about buying a business? As a California Business Brokerage, we represent individuals and companies who desire to buy businesses. When representing a seller we also usually spend a good deal of time working with the buyer. On this page and on the subsequent pages I will outline some tips, suggestions and strategies that can help you realize your dream of owning your own business.
The first question that many people ask is why. Why should one buy an existing business versus start a business?
Here are 10 reasons to think about buying a business versus starting a business.
1. Great businesses are bought and sold everyday. I have found that there is a misconception about businesses that are being sold. Some people think that there are no good businesses on the market. Whereas there are some businesses that are losing money or are distress sales there are many more that are profitable, stable businesses. Why would a business owner sell this type of business? The main reason is burn out. Many owner simply desire to do something new. Another reason is that many owners want to retire and their heirs have no desire to run the family business.
2. Less Risk. Starting a business is risky. A recent Business Week article discussed a survey that followed start ups over the course of several years. Out of the group 64% failed. That is 2 out of three. By buying an existing business you are essentially buying a business that falls into the 1 out of 3 category. There is certainly risk when you buy any business, but statistically buying an existing business is less risky.
3. Lenders know all about number 2. That is why it is easier to raise capital to buy an existing business. Banks are more apt to lend when there is less risk. What about SBA? SBA loans are guaranteed by the government but the banks still do the underwriting. Underwriters do not like high risk. Additionally, the business itself is what helps to guarantee the note. A buyer may still need to make some personal guarantees but it far easier to finance an ongoing concern rather that a business plan.
4. The infrastructure is in place. Retail, restaurants, manufacturing, etc. - these businesses need furniture, fixtures and equipment to operate. The cost of these items can be huge when purchased new. They also need to be installed. Buying a new business allows the new owner to step in and start making money day one.
5. Location. For certain businesses location is very important. In Southern California, space is very limited and very expensive. Buying a business allows the owner to step in an take over an existing space versus compete for new space. In some cases the lease can be assumed.
6. Trained employees in place. This is another reason that start ups are challenging. Existing businesses often have highly qualified employees that are in place and eager to work for the new owner.
7.Intangible assets. By buying a business you are buying an income stream. You also get patents, trademarks, copyrights, goodwill , etc. with it. The businesses name is established and the customer base is in place.
8. Business acquisition is a proven model. As long as there has been businesses, owners have been buying and selling them. Acquisitions are a very popular way for large companies to grow. It is easy to believe that if it did not make financial sense these companies would not do it.
9. Making an offer, when properly structure, is risk free. The buyer's offer has contingencies that allows the buyer examine everything they want to during due diligence. Typically, no money changes hands until the buyer is completely satisfied. If the seller cannot prove what they need to the buyer can re-negotiate or walk away.
10. The business pays for itself. The income from the business pays the debt service. Through leveraging, a buyer can achieve significant ROI and ROE. There are few investments that can provide a income to live on and will gain equity. When you are ready you can sell it.
Click here to read more about how leveraging your resources can make improve your ROI.
What type of Buyer are You?
Owner Operator - The majority of buyers that business brokers work with are individuals that seek to purchase a business to own and run. This applies to businesses of all sizes - not only small main street businesses. This type of buyer is typically interested in a business which can service the debt required to buy the business and can provide an income that the buyer is accustomed to. Often the buyer has a background in a particular industry and desires to have their own operation.
Individual Investor- Many sellers believe that there are turnaround buyers, or investors that buy businesses just to be an absentee owner. These type of buyers are rare. Most often these type of buyers are interested in very specific types of businesses such as gas stations, coin laundries and self storage.
Strategic Acquisition- Some business owners work with a business broker in an effort to identify businesses that could compliment their existing business. Occasionally, a business owner wants to buy out a competitor or purchase a vendor as a means to grow their current business. In addition, some owners seek complimentary businesses to vertically integrate them into their existing business. IE- an auto repair business buying a towing company. These types of acquisitions often make a good deal of financial sense and here the buyer has different motives than the owner operator.
Private Equity Groups- In the context of small and medium businesses PEGs often buy businesses to "roll them up" with several other small businesses. This results in a much larger business which the PEG often sells for a profit.
Almost all business transactions are financed. Therefore, it is very important to have a general understanding of how business acquisition loans are secured. Information on the SBA, business banks, interest rates and more...
Learn how business purchase financing is secured.
Are you considering buying a business? Where does one start? The best strategy starts with identifying your needs and goals.
Click here to read my advice about identifying your goals and resources.
Learn about the process of buying a business. Read California Business Broker .com "Insiders Tips." These are my tips and "rules of the road" when moving forward with an acquisition.
Click here to go to Buying - Rules of the Road.
Should you work with a business broker when buying a business? Learn how a California Business Broker can help you with your search.
Click here to go to "Working with a Business Broker when Buying a Business."
Negotiating the purchase of a business does not have to be an ordeal. Read how to effectively work through this process.
Read 10 Tips for Negotiating the Purchase of a Business
Have a Specific Question that you would like answered? Go to the Buy a Business Forum and ask!
Are you actively looking for a business to buy right now? Take a look at my current listings. All of my listing have detailed business profiles available and some even have videos. (Signed Non-Disclosure agreement required)
Click here to go to Listings
Stay in touch with California Business Broker .com with my monthly e-newsletter. I am constantly adding new informative articles. We also notify subscribers of new listings before they are listed on the public sites.
If you are in the Southern California area and are reading this because you are interested in buying a business, we would like to speak to you. We would be interested in learning more about what type of business you would like to buy. There are never any fees unless a transaction occurs and most of the time those fees are paid by the seller. Take the first step and contact us today.
Make sure to take a look at our listings as well!
Click here to go to the California Business Broker .com contact page.
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