Thursday, April 3, 2008

Buying a Business

Buying a business is a lot like buying real estate. This post will take you through the steps of buying a business and all the options you have as the buyer. In previous posts I explained the difference between a owner absentee business and an owner operated business and which business I prefer. When looking at different businesses you should take a lot of things into consideration:



1. The type of lease in place (how many years, what rate per sq ft.)

- Can it be assgined , sublease options?

2. The location value ( where is it located - good neighborhood, good visibility? )

3. The Value of the business - net income, cashflow, balance sheet, and assets.

4. The assets - certain employees, machinery, inventory, improvements, intangibles (ie .website, emails, licenses, etc).



When considering the price of the business , the main things to look at are the lease, the net income, and how the business is run (absenteee or operated). When you make an offer or deliver your letter of intent, you should never offer the price that you want to pay, always offer less. In the negotiating process you may be able to get certain things out of the seller like a credits, or even a seller carryback loan. The best case for you as the buyer will be for you to buy a $100,000 business with $20,000 or less, and have the seller give you a carryback loan for the other $80,000. The terms of the $80k will have to be negoatiated properly, but you have a lot of power as the buyer, knowing that the seller wants to sell their business. There are no rules to buying businesses so pretty much anything goes if you and the seller can come to an agreement. What I have given you is an outline of how most business transactions work. My ultimate business purchase would be an owner absentee business , with $10,000 or 10% down, a 90% carry back loan at 5% over 10 years, with a net income of $50,000 / year. You might say , this would never happen, but I can tell you it happens everyday! Stay tuned for some actual stories of business owners.

3 comments:

Zero to Millions said...

very insightful

Lisa T. said...

Nice post. I want to run my own business soon, so I'll remember this one. I know it'll be challenging, so I can use all the help and advice I can get. I've been thinking about buying a business lately instead of starting one from scratch. Maybe a franchise? I don't know. Do you have any suggestions or advice? Thanks!

Alicia Allen said...

@Lisa T. -- Yeah, regardless if you start one from scratch or buy an existing one, running your own business will be tough, but it’ll be rewarding in the end.

If you do take the buying route, there are a lot of sites you could check out for one. There's one called BizTrader.com. It's like this an online global marketplace where you can buy or sell a business. It has useful tips and advice, and you can also use it to find a lender or broker. Not bad at all.

Then there are always the small business groups in your area. They should be able to provide help and advice. If anything, it doesn't hurt to network.

Good luck!