Are you tired of working for someone else? Ready to take the plunge and become a business owner? You aren’t alone. According to the Chamber of Commerce website, for the period of 2009-2016, around 400,000 small businesses are started each year.
However, as we all know, the road to success in business is littered with startups that did not make the cut. Lots of them fail – within 4 years of starting, more than 50% will fail. In fact, it is very common to find that owners of successful businesses tried more than once to start a business in the past, but failed.
In the opinion of many, a 50% failure rate is an unacceptable risk – especially as new business owners have often quit their current job and gone into debt just to get that business off the ground. When that business fails, they can be left penniless and facing the prospect of returning to old jobs (if they are available) just to survive.
A Better Alternative to Starting Your Own Business
But there is a better way: Instead of taking on all the risk of starting your business “from scratch,” building it from the ground up, and taking on all the associated risk, pursue a program of carefully acquiring an existing business.
As most new business startups fail within the first 4-5 years, acquiring businesses that have been in existence longer than that greatly reduces your risk considerably.
Probably the most stressful time for any business owner is in those initial years when they are working hard to get a foothold in their industry, beat out the competitors, establishing the proper pricing on their goods/services, getting employees hired and physical location(s) set up.
When you step in and acquire a business, you won’t have all that stress as the business is now established and profitable.
A Larger Footprint. Could the purchase of an existing business benefit you even if you currently own your own company? Absolutely. In fact, larger companies and major players in any industry do this all the time.
By purchasing a company which is one of your competitors, or which operates in a related industry, you can very quickly increase your business footprint in the marketplace. And a properly structured acquisition can allow you to reduce your overall expenses by eliminating duplication in staffing, facilities and suite of services/products being offered.
And when you acquire another company, remember that you are also acquiring their customer base and can continue to reap the benefits of their existing brand name recognition and marketing efforts.
Buying Someone Else’s Problem?
Initially you might be hesitant to acquire an existing business. After all, couldn’t you just be taking on someone else’s problem? After all, they are selling for a reason – if the current owner wants out why should you want in? But there are ways to mitigate this risk:
Due Diligence. What reduces the risk involved in any business decision? Having the right information about the situation. When you are purchasing a business you must do your research properly, looking into every aspect of that business. You will need to look at the current profit/loss situation. You will need to get a firm grip on the market itself – is it growing or shrinking? Has the competition stepped up their game? Is the business carrying too much debt?
Proper Valuation. The information that you will have from the due diligence phase will allow you to properly value the worth of the business. While most valuation formulas will use a multiple of yearly profits as a base, adjustments will need to be made depending on current marketplace trends and future cash outlays, such as paying for equipment upgrades or labor contracts that will soon have to be re-negotiated.
A quick example will illustrate the need to be flexible in the approach to valuations. Some businesses are purchased that are in troubled times. These businesses will not probably be operating for much longer, at least in their present state. In situations like this, the business may be purchased for the purpose of selling off its assets for a profit (such as present inventory or fleet of vehicles, or property/buildings). A troubled business with significant assets and low debt may be an excellent prospect for acquisition and liquidation.
However, if the business being purchased is expected to operate for the foreseeable future then the valuation must take into account the current income that it is generating, the state of the industry and the general business/economic climate, as the business will be retained by the new owner for a longer period of time.
Reasons for Selling. Don’t assume that a business owner is looking to sell because there are hidden problems at the company. That may be the case, but there are other reasons why a business owner may be looking to sell their business. They may be nearing retirement age or dealing with health issues. They may need the cash-out payment to meet living expenses, reduce personal debt or to provide a retirement nest egg.
According to the California Association of Business Brokers, over the next 20 years more than 70% of the 12 million privately-owned business in the U.S. will change hands. Even when the owner has family they may not desire to transfer ownership to them, as their family members may not be qualified or even interested in continuing the family business.
Again, due diligence is the key component here. Profitable, high-quality businesses are being put up for sale every month – but you’ve got to know where to find them, how to investigate them, and make a proposal to them that will beat out other offers to buy.
How to Pick a Good Business Broker
If you are looking to pick a winner to serve as your business broker, to help you to acquire your next business (or your first business), you should approach this from the business seller side. You need to know that most M&A advisors ad business brokers are only able to successfully sell about 20% of the businesses that are listed with them.
If you can find a business broker that is doing better than the industry average when they sell businesses, that means that they will also be more effective in helping you to buy a business, the right business for you, at the right price.
