Unlocking The Door To Success

Take a shortcut to start-up by buying a turnkey business.
Magazine Contributor
9 min read

This story appears in the September 1997 issue of . Subscribe »

Getting Into for yourself doesn't necessarily require building a company from scratch. If the thought of navigating your way through the start-up process is holding you back, consider taking the entrepreneurial plunge a different way: Buy an existing business.

This alternative route to has some advantages worth considering. It allows you to bypass all the steps involved in creating a business infrastructure, because the original owner has already done that. You can take over an operation that's already generating cash flow and perhaps even profits. You'll have a history on which to build your forecasts, and a future that includes an established customer base. And there's generally less risk involved in buying an up-and-running operation than there is in creating a whole new company.

"When you buy a business, you're buying something you can touch, see, examine and evaluate," says David H. Troob, chairman of The Geneva Companies, a national mergers-and-acquisitions services firm in Irvine, California.

You're also buying something that's already producing a product or service, which is what motivated Roland Reems and Mike Nofsinger, co-owners of Moran Co. in , , to buy their company in 1978. The two had spent most of their working careers in the printing industry, so it made sense for them to buy a printing business. And with their industry connections, they had orders that needed to be filled right away.

Due to the equipment-intensive nature of the business, Reems estimates it could have taken as long as a year just to do the setup necessary to start a full-service printing company from scratch. Taking that time would have put them at a serious competitive disadvantage. "We needed to be immediate producers and providers, without losing momentum," Reems says. "We didn't need to remove ourselves from the marketplace for the time it would take to order presses and start a printing business from scratch."

Of course, there are drawbacks to buying a business. Though the actual dollar amounts involved depend on the size and type of business, it often takes more cash to buy an existing business than to start one yourself. When you buy a company's assets, you'll usually get stuck with at least some of its liabilities, too. Even so, you just might find the business you want is currently owned by someone else.

Why do people sell businesses--especially profitable ones? For a variety of reasons. Many entrepreneurs are happiest during the start-up and early growth stages of a company; once the business is running smoothly, they get bored and begin looking for something new. Other business owners may grow tired of the responsibility, or may be facing health problems or other personal issues that motivate them to sell their companies. In fact, some of the most successful entrepreneurs go into business with a solid plan for how they're going to get out when the time comes.

It's a good idea to at least consider buying a business as part of your early planning--especially if the appeal of being in business for yourself is in running the company rather than starting it.

Jacquelyn Lynn is a freelance business writer who has specialized in marketing and issues for more than a decade.

Where to Look

The best place to look for a is within an industry you know and understand. Buying a business is a serious commitment; be sure you choose one you'll be happy running. You should have a solid familiarity with and some experience in the general industry.

Your next consideration is geography. The business should be in an area that meets your personal lifestyle and business requirements. Make sure there's an adequate labor pool and that the costs of living and of doing business are acceptable to you.

Look at every business in the area that meets your requirements; just because it isn't on the market doesn't mean it isn't for sale. Use your networking skills to find potential companies; let friends and colleagues know what you're looking for. Reems and Nofsinger ran a "Wanted to Buy" classified ad that described their requirements; a response from the owner of a family-run company who was nearing retirement age resulted in a successful sale.

Evaluating a Business

One of the most challenging financial calculations is determining what a is worth. Research the selling price and terms of recently-sold companies in the industry, and use them as a guide. Or you may value the company based on its after-tax cash flow or on the value of the company's assets, if they were to be liquidated, minus its debts and liabilities. Call on your financial advisors to assist you with these calculations.

The figures are only part of the equation. The company's reputation and the strength of the relationship the current owner has with customers, suppliers and employees are not so easy to measure.

Doing your homework is an essential part of the acquisition process. It's called "due diligence," and it includes reviewing, auditing and verifying all the relevant information about the business. Thoroughness at this stage means you'll know exactly what you are buying, and from whom.

Part of due diligence is checking out the seller's claims about the business's volume and its standing in the community. Contact customers and vendors to verify their relationships with the company. Check with the Better Business Bureau, as well as the appropriate trade organizations, licensing agencies and credit-reporting agencies. Ask your accountant for assistance in reading financial statements. Checking with your banker during the due-diligence process can help you learn if the financing you need will be available. And, of course, have your attorney review your sales contracts and related documents before signing.

Even as you gather and consider input from your advisors, remember that you're the buyer and the final decision-maker. "The responsibility and control of a deal are all yours," Reems says. "Once the deal is made, the responsibility for its success is going to be yours."

Negotiating Tips

Once you've found a you're interested in, don't be the first person to mention price. Let the seller name the first figure, and negotiate from there. If there's a broker involved, remember that brokers are the seller's agents, and they make their money from the commission the seller pays. Though it may not be necessary, consider hiring someone skilled in business acquisitions to represent your interests.

Settling on a price is only the first step in negotiating the sale. Troob points out that the structure of the deal is more important than the actual price. He suggests being prepared to pay between 30 percent and 50 percent of the price in cash, and financing the remaining amount. You may through a traditional lender, or the seller may be willing to "hold a note"--which means he functions as a lender would, accepting payments over a specified period of time. This assurance of future income appeals to many sellers.

Many sellers are open to other terms, such as accepting benefits like a company car or insurance, for a period of time after the sale is completed. Though such agreements may reduce the upfront cash you'll need, Troob advises approaching them with caution. Have your attorney study the details for legality and liability. "You don't want to promise to do something that's going to cause you problems later on," Troob says. "You want to be sure your time is spent running the business and not correcting a mistake you made in the acquisition."

Reems advises including a noncompete clause in your terms of sale; your new business won't be worth much if the seller opens a competing operation down the street a few weeks after you take over his old company.

Finally, remember you can walk away from the deal at any point in the negotiation process before a contract is signed. "If you don't like the business, or if you don't like the deal, you don't buy," Troob says. "Just because you spent a month looking at something doesn't mean you have to buy it. You have no obligation."

Managing the Transition

Let the seller know what your plans are for the . He probably has an emotional investment in the business as well as a financial one, and will be more comfortable and supportive of the entire process if he feels good about what's going to happen to the company after he leaves. "Before and after you close the deal, spend some time selling your concept to the principals of the company, their key employees, their customers and suppliers," Reems says. "Plan for the future together with all these people, get them involved with you and reassure them as to what you're doing. Don't make it a secret unless you absolutely have to."

Though you should certainly negotiate for the best price, be willing to pay a fair price. A seller who feels good about the price and terms will make a much more positive contribution to the transition than one who feels ripped off.

No seller can guarantee specific customers or even valuable employees will stay with the new owner, but there are things you can do to ensure a smoother transition. Most sellers participate in a transition period that typically ranges from six months to two years. During this time, the new owner is introduced to customers and vendors and becomes familiar with all the details of the operation. Take advantage of this time to reassure employees their jobs are secure.

It's critical, Reems says, to communicate clearly and regularly with everyone involved in the company. "Let people get to know you," Reems says. "You'll get to know them in that process. Keep your door and your ears open. Don't let people see you as a threat. Use good sense in place of muscle. Come in as somebody who's going to be really good for the entire organization."

Though you want to do it with tact and grace, once you've taken over the reins, make the company yours. You'll want to make changes, try new things and grow the business--and it's reasonable to expect that not everyone will agree with what you do.

"Don't spend too much time with disgruntled or uncooperative people," Reems says. Realize that you may lose a few customers, or that some employees may leave. But apply your own vision and put your own plan in place as soon as possible--because even though the company may not have originally been your idea, and even though you didn't nurture it through the start-up process, it's yours now.

Contact Sources

The Geneva Companies, 5 Park Plaza, Irvine, CA 92614, (714) 756-2200

Moran Co., P.O. Box 592068, , FL 32859-2068


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