Buying a Business
Q: I currently work for a small company that has been profitable for about 30 years. The two owners are thinking about getting out, and I'm very interested in buying them out and taking this business to a whole new level. How do I determine a fair price? A friend of mine recommended figuring out what their profits are (after paying out salaries), then multiplying this figure by five years, and that's what the purchase price will be. Is this accurate?
A: What your friend said is one rule of thumb, and you can sometimes use it, but the problem is that there are hundreds of rules of thumb! Sometimes you might use a multiple of cash flow; sometimes you might use a multiple of yearly cash flow. You've got to take many, many different factors into account, including the industry and the state of the economy.
There are a couple of things you can do. First do some research-check out www.bizbuysell.com and www.usbx.com. If you go through a few of these, you'll see some rules of thumb that stick out. Another route is to hire a valuation firm (that's what my company does)-your accountant or estate planning attorney probably can recommend one-and have them advise you on what that business is worth. You can spend a few hundred bucks and probably save a lot of money by having them help you avoid a mistake.
Help! Where Do I Start?
Q: I want to start an IV therapy center. I know what to do in the center, but I don't know where to start with the business part. What do I need to do?
A: Getting started is difficult, and there so many unknowns. The way I often try to solve a problem like this is to just start a list of things to do, and add to it as I think of more issues. Just write down everything you can think of, in no particular order (you can organize later). In your case, your list might look something like this:
- Do I buy or lease an existing building?
- If so, will I have to renovate?
- If so, how much would that cost?
- Can I get a loan? (Talk to a bank.)
- Will I need to build something?
- How much would that cost? (Talk to a builder.)
- How much space do I need?
- How much would my monthly operating costs be (heat, water, gas, mortgage/rent, etc.)?
- How much business would I have to sell to pay these costs?
- After my costs are paid, is there enough left over to make it worth all my time?
And so on. One thing to keep in mind: Knowing how to do technical work is very different from running a business that does that technical work. (A great book on that subject is Michael Gerber's The E-Myth.)
The main thing that I would do is to go to some nearby towns (where you won't be competing for business), find a few similar places and talk to the owners. They will almost certainly be happy to tell you about their experiences and mistakes and give you advice. Nothing you can do will be more valuable than this.
Finally, for the mechanics of starting a business, I'd say to start with a good attorney. They'll guide you through the mechanics of getting started, and anything you pay them will be money well-spent.
Q: I came up with an idea for a product, but I have no idea how to make a prototype. My questions are:
- Who can build me a prototype of my product?
- How can I trust this person if my product isn't patented yet?
- How do I check to see that this product doesn't already exist, and if it doesn't, how do I patent it?
- How do I locate a manufacturer for the product?
A: You can absolutely find your way through this, but be prepared to do a bunch of research and leg work. It is hard to advise you on where to go to get a prototype built without knowing more about the product. The first place I'd look would be to go to www.google.com and search on "XX prototype," with XX being your product. You'll find contract manufacturers who will be able to do it for you.
There really isn't a good answer for whether you can trust them not to steal your idea. In general though, I don't usually worry about this because I have found that by itself, an idea isn't worth much. The real value is in the talent, brains and determination to make it successful. The vast majority of people you deal with wouldn't steal your idea, and of those who might, most of them don't have the time to use it-they probably have their own company and plenty of ideas of their own. It is a tremendous amount of work to bring a product to market, and few people would try it with the risk of you suing them hanging over their heads.
That being said, my understanding is that this is a bit more of a risk when dealing with very large companies, which sometimes see stealing ideas as just another way to do business. The best thing, in my opinion, is just to trust your gut and go for it.
The patent process is pretty straightforward-there is a lot of information on the U.S. Patent and Trademark Office Web site. If you move forward with this, you will probably want to work with a patent agent or patent attorney who can guide you through the process and help you with searching for similar products. Also, go back to Google for that.
Once you get through all that and are ready to manufacture your product, you'll find many, many companies ready to do that for you-just search on "contract manufacturers" on Google, and you'll be amazed at how many there are.
Selecting Retail Space
Q: I operate an interior decorating business out of my home. The business is successful by many standards. My husband and I have discussed branching out and opening a home specialty store in one of the local shopping centers. We've searched for information on starting a small retail store, but most of the information for starting a business that we find deals with manufacturing, franchises or other homebased businesses. Where can I find information on how to select retail space and how much space is needed, where to get store fixtures and products, and how to finance the early stages of a retail store?
A: I talked to a friend of mine who had a great deal to say on this. I thought his wisdom might help. Here's what he had to say:
First, talk to some small retailers. Ask them how it's going and how they started. Some may be unwilling to talk to a potential competitor; find someone else. Don't try to hide what you're doing; many people will be delighted to offer information. Small-business owners tend to be a clubby sort, particularly in a strip sort of area, where more stores means more traffic and everyone can win. Obviously, this won't work well if there's already a store of your type in the strip you're looking at.
The next fairly simple thing to investigate, math-wise, is the cost of retail space. Anywhere there's a blank retail window, there's a phone number of the person who wants to fill the space. Call them and ask about the cost of the space, what that includes, the minimum lease times, and the typical utility costs or whether they're included. While you're at it, ask about typical traffic for the unit.
Check with surrounding business owners, too. Ask how the landlord is about problems, whether they're happy where they are, whether they get good traffic. Ask them about who provides their insurance in the retail sector, and you'll get some agent names. Ask the lessor what kind of shop was in the space before you and maybe even before that.
Next, find the market that sells what you'd sell, and go there. There are homebuilders' shows, retail clothing, jewelry, furniture, everything. And until you go and actually talk to some wholesale vendors-the people you'll be buying from to equip and fill your store-you simply won't know what you can and can't get and how much it will cost you. Some places won't sell you just what you need; there are often minimum amounts to buy, particularly for more popular brands.
On the other hand, wholesale vendors may offer you great ideas for starting your store. Don't be bashful about the fact that you're opening a new store. You've been in business for a while, you're experienced in your field, and now you're adding a retail outlet and looking for experienced vendors to help you make it a success. I guarantee they'll talk to you. It's all in how you present yourself. If you seem serious at all, they'll take time and help you. If they don't, find another vendor-the next booth over is probably perfect. (That's the great thing about shows.)
Keep in mind that the time spent managing the store will not only include the time that your doors are open, but also the time buying, receiving, stocking and returning inventory. It will include trips to the bank (hopefully lots of those!), monthly inventory checks, tax preparation, licenses and so on. That's not a reason not to do it; it's just time that you have to spend. But you should be paid for that time, and that should enter into the "cost" of the store. You should be aware of it upfront, and then make your decision.
Q: I'm an absolute novice about starting a business. Could you please give me some ideas or a Web site where I could gather step-by-step information on starting a business?
A: Wow, that's a tall order! There are lots of books on this subject (just try a search on Amazon.com), such as Start Your Own Business by Rieva Lesonsky and the staff of Entrepreneur, and lots of Web sites, but I don't know of one that I'd really recommend, other than Entrepreneur.com! Seriously, if you are looking for "getting off the ground" advice, that's the place to look. You'll find articles on licenses, incorporating, working from home, you name it.
If I can just give you some basic advice (and a lot of this depends on the kind of business you are going to start)-watch your overhead like crazy-it is easy to get caught up in the excitement of starting a new business and, especially if you came from a big company, think that you need all kinds of expensive equipment, office furniture, etc.-and usually you don't.