Is Now the Right Time to Buy a Business?
Make sure to do your research and due diligence before making the purchase
Over the past year, historically high levels of unemployment have left record numbers of highly skilled individuals looking for work. Many are asking themselves if now could be the right time to pursue their dream of buying a business and becoming their own boss.
With corporate jobs less secure and available now than perhaps at any time in recent history, buying a small business could be an excellent way for many of these unemployed individuals to take control of their own destiny and success. Tough economic times have created an abundance of distressed companies in the business-for-sale marketplace, meaning business buyers currently have access to great bargains. However, anyone thinking of becoming a business owner must undertake considerable research and self-evaluation before taking steps to turn the idea of buying into a reality.
Anyone thinking of purchasing a business should keep the following points in mind before going further:
Analyze Your Strengths, Weaknesses and Lifestyle Needs
While the thought of running a business is exciting and causes many would-be entrepreneurs to want to buy as quickly as possible, it's essential to properly evaluate what type of business suits you. When buyers choose the wrong businesses, their entrepreneurial dreams can quickly turn into stressful burdens.
For this reason, you should do a careful analysis of your strengths, weaknesses and lifestyle needs before diving into the buying process. Here are five critical questions to ask yourself before deciding what type of business is right for you, or if you are even cut out to be a business owner:
- Do I have hobbies or interests that I want to make a part of my daily job? Business buyers often ignore their interests and look for a business based solely on what they think will be the most profitable, which can have negative consequences. Money-making potential is important and should be considered, but if you have no interest in what you do, it probably won't make your life any better.
- What are my strengths and skills? Business buyers should also consider their personal strengths before looking for businesses to purchase. Maybe you're a skilled writer and communicator, excel at teaching concepts to others or have a knack for technology. If you buy a business that allows you to put your strengths to work, it will have a much better chance of succeeding.
- Are there any particular times I absolutely can't or don't want to work? If you buy a business that requires a schedule that will complicate your life, the business you thought would make life better will likely do just the opposite. If you're considering a specific type of business, talk with current owners of similar businesses to get a sense of what their schedules are like. Keep in mind that owning your own business does not necessarily mean more free time; it can mean just the opposite. Be prepared to handle the long hours that often come with running a business.
- Am I comfortable managing people? Just because you want to be a business owner doesn't mean you are--or need to be--a "grade A" manager of people. However, if you buy a business that won't involve a manager on staff to do it for you, you'd better make sure you're comfortable with the situation before committing. For example, should a situation occur that is hurting the success of the business, would you feel comfortable confronting employees who were at fault, or would you be more likely to pretend it's not happening?
- What size business do I want? Small businesses can range from zero to 100 employees, which means that there's no cut-and-dried small-business owner experience. An owner of a five-person company will likely have a very different role and lifestyle than an owner of a 50-person company.
Understand the Market
It's not uncommon for new business buyers to enter into the buying process without a solid understanding of the small-business market and what they should look for in an investment. These buyers are only throwing nails in the road by being unprepared and are positioning themselves for hard times ahead.
The moment you identify a business that grabs your interest, you should begin investigating the business and everything surrounding it--including the industry as a whole, competition, marketing efforts, suppliers and so on. It's important to do this early so that once you contact the seller, you'll know exactly what to ask.
You should know what a business in your location and industry of interest typically costs. Websites such as BizBuySell.com offer tools to enable you to conduct quick and easy business valuations by benchmarking the business you want to buy against businesses in the same industry. Whether you're interested in buying a casual pizza restaurant in Chicago or an auto repair shop in San Francisco, these resources will give you some guidelines for what you can and should expect from a pricing standpoint.
Finally, you should make a point to talk with existing business owners--ideally in the industry you'd like to enter--who can speak from experience and offer invaluable advice on how to approach a purchase for the best results.
While some business buyers feel equipped to go through this process alone, others opt for the help of a professional business broker. If you don't feel comfortable taking a do-it-yourself approach, a business broker can help make sure you cover all bases and avoid getting burned in a transaction.
Run the Numbers
Before taking serious steps to buy a business, it's important to know exactly what you can afford and how much income you'll need every month to live comfortably. Someone who has $500,000 in the bank is going to experience a buying scenario much different from someone who has $20,000.
If you have significant cash reserves you're willing to put toward financing the business, you won't have to worry as much about securing financing for the business through a bank. If don't have reserves, pursuing businesses for sale with a seller-financing option is probably ideal. Since bank loans are so hard to come by, seller-financed opportunities are most likely to pan out.
Seller financing --when a business seller agrees to finance part of the sale, with the buyer agreeing to pay the seller back with interest over time--has become a crucial element of business-for-sale transactions during these tough times. In many cases, seller financing can also be more advantageous to buyers because it helps ensure that sellers will remain vested in the success of the business after you take over. Your success is directly related to your ability to pay the seller back.
Narrow Down and Negotiate
If you've done your initial due diligence and have determined that buying a business is the right decision for you, it's time to narrow your options. Pinpoint the top three or so businesses for sale that most appeal to you and carefully weigh the pros and cons of each. Is one located more conveniently to where you live? Does one seem to have a longer track record of success and a more established customer base? This will make it much easier to come to an informed, justified decision on which business you should pursue.
After you correspond with the business seller and get serious about going through with a transaction, you'll enter a negotiation process. Since the down economy has created a distressed selling situation for many sellers, the time is right for you to be able to negotiate a great deal . This is when it pays to have a comprehensive understanding of business valuations and the knowledge to ensure that you arrive at a number that's fair and that you're comfortable with.
Once you reach a pricing agreement with the seller and progress to the stage of an accepted offer, it's time for more due diligence. The period of financial due diligence typically lasts from 10 to 30 days and allows you access to all of the company's books and records. Review them carefully, and if you're working with a broker, make sure that broker clearly explain to you the implications of the information.
It's a buyer's market, so if you approach your entrepreneurial dream with the right amount of consideration and research, buying a business could prove a realistic alternative to the job search. You just might find that it's time to leave your traditional job description behind and become your own boss.
Mike Handelsman is Group General Manager of BizBuySell.com--located in San Francisco--and BizQuest.com, two business-for-sale marketplaces. Both sites feature business valuation tools that draw from the largest databases of sales comparables for recently sold small businesses, and two of the industry's leading franchise directories.