Buying a Business – Prepare Yourself

So you have decided that you would like to run your own show and buying an existing business versus starting from scratch is the way to go. This is a very wise decision if you have not been involved in a start-up before. The question then is: Are you ready?

The following steps need to be taken in order and looked at very seriously. This is just the beginning but it is necessary to be in the right position to make what will be a very big, life changing move.

Step 1: What type of business? -

You need to decide what kind of business you want to be in. At least whittle it down to two types. If you don’t, a few things will happen. First, you will be looking for a long time in a very wide circle. It is hard to get a grasp on a good business opportunity when you have no idea where you want to be. If you are all over the place, you are not ready to buy a business.

Second, the people who will most likely be helping you (advisors, brokers, etc.) will not want to be around you for long. They will be spinning their wheels with you and will quickly put you at the bottom of the list. Even sellers who are attempting to sell on their own will get annoyed with you very quickly if you bombard them with questions but otherwise don’t seem too interested in their business.

Step 2: Do you need a partner? -

Partners are necessary for two things. Either they will supply you with capital or they will provide you with skills you may not have. The latter is a better reason for a partner and a combination may work as long as you are going in with an even money 50-50 deal. I don’t recommend picking a partner based on their bank account. You will most likely have major problems within 12-18 months. Trust me, I’ve been there.

Running a business by yourself, especially for the first time, is a scary proposition. But having a good accountant, lawyer and a business advisor is the way to go. At one point or another, even your best friend will turn on you as a partner.

You are better off having someone that covers your shortcomings as your employee, along with a deal to give them a small piece of the pie while they remain an employee. Having a partner or two holding a large chunk of the business over your head will quickly stifle you and make you regret the purchase.

Step 3: What kind of buyer are you? -

In my experience, there are three main types of true buyers: those that look only for high cash flow, those that look for decent positive cash flow with the thought of using their experience to grow the business, and those I like to call bottom feeders.

Bottom feeders like to look for sellers in a really bad position such as fighting partners (see step 2), or negative cash flow due to an inexperienced owner. These are perfect to scoop up for next to nothing because the sellers not only want to get out, but they need to get out.

If you are a bottom feeder though, you better be good at turning things around quickly because these businesses are in major disarray. Being able to see how to get them into a positive cash flow or a good light quickly is a necessary skill too. A bottom feeder could also be looking for the opportunity to grab equipment and fixtures cheaply for their already running business.

Also keep in mind that it will be next to impossible to get seller financing from these types of purchases. The last thing these people want is to remain tied to the business or their arch enemy ex-partner.

I should point out that if these are “true” buyers, then there are also “false” buyers. These people are either the unprepared and uncommitted buyer that I am trying to not let you be or they are just looking for information. This means either they already have a business and they are trying to scope out competitor info to help them or they are prepping to start a business from scratch and could use the information to help them get a leg up in the process.

Step 4: How am I going to pay for this? -

Please don’t make the mistake of thinking that because you are buying an existing business that a bank is just going to hand over the money. Even if this business is doing extremely well, this most likely will not happen. It is true that buying a solid business with strong cash flow will help, but the business type, collateral and your background are very significant.

And no, you can’t just apply for an SBA loan. These are not easy to get and yes you do have to pay them back. The government isn’t that nice. Again, business type, your personal collateral and a lot of other factors determine this loan process. Normally, this is not the fastest way to get a loan either.

Please know that your own money (including your house) as well as friends and family are going to be your main resource. Property involved in the sale is a big help. Keep in mind that the “cash based” business you may be dying to get into is the hardest to get funded by a bank. There is usually not enough proof on the books and in tax records for a bank to give you a loan based on the merits of the business. That’s the main drawback of the cash business.

There is one other way to get a loan. That would be through the seller and it’s called “holding a note”. Risky businesses like bars and restaurants (especially without property), as well as any other retail type business, are a prime target for a seller holding a note. Typically you will being putting down 30%-70% with the rest financed with or without interest for a period of 2 to 5 years. It may take some convincing, but most sellers will give in when they realize that in order to get what the business is worth, they need to hold a note. Business Brokers come in handy when this kind of convincing is needed.

Step 5: What can I afford? -

Usually the cash flow of the business is the best indicator to use for valuing a business. Often a “rule of thumb” multiple for the industry combined with factors such as location, years in business, revenue trends, market situations, etc. are used to multiply against the cash flow. When this is the case, the buyer and seller will be closer to being on the same page for determining a fair price.

It is also a good indicator to use because this is how you will determine if you can pay off a loan using the business cash flow. For instance, say a business has a $100k cash flow and you buy it for $200K with 50k down. That means you have a note for $150k. Say that the note has a 2 year time frame with no interest from the seller. That means you will be paying out $75k a year for two years.

Can you survive personally on $25k or less a year for 2 years? Don’t forget that things will probably slip a little when you take over and that you may need additional capital as is often the case. Do you have enough in the bank to handle this for 2 years?

You need to know this. Having these scenarios in your head ahead of time will eliminate looking at businesses that don’t completely fit your needs. This will also avoid wasting time, money and energy. It’s not as simple as finding a business with a great cash flow and hoping all is well.

Hopefully this very simplified example will show you that it takes money to make money even in an established business. If it were that easy, anybody could buy a company with a million dollar cash flow.

Step 6: Commitment to buy -

This sounds obvious but it really isn’t. You will be wasting a lot of your time, seller time and broker time if you are not absolutely sure you are ready to do this. In addition, you will waste money if you get an advisor involved to help you determine if this business is a fit and worth purchasing (I highly recommend this by the way) without being mentally ready and committed.

Believe me when I tell you that a seller or broker is not going to give you much financial and business information unless you are committed enough in the buying process. An uncommitted buyer is very easy to spot, especially to a business broker.

Congratulations! You are now ready to start shopping for a business and will be prepared to buy when the right opportunity presents itself. I know I have said it a few times before, but I highly recommend using a business advisor to prepare yourself in determining the right business and price range for you before business hunting.

Again, having a broker between you and the seller is also a good idea. Most importantly, do not get a lawyer involved at this time. Unless you need a pre-emptive agreement made between you and a potential partner, attorneys are unnecessary and a hindrance at this stage. They really should not be introduced into the process until you are in the due diligence stage.

3 Domain Investing Myths and Facts That Will Shock You

Are you wondering why domain investing has been such a hot topic lately? Oh, you haven’t heard the news? Well, let me get you up to speed on what has been going on in the domain investing world. Sit back, grab a cup of joe and join me as I explain why you NEED to be thinking about getting in on the domain game now while the window of opportunity is still there and the iron is hot.

Domain Myth:
Domain investing is a dead industry. All the good names are taken and the ship sailed on all that when the dot com bubble burst earlier this decade….

Domain Fact:
WRONG! The domain investing industry is alive and kicking. In fact, recent changes brought on (ironically) by the down economy has made domain investing more lucrative than ever! It has created opportunities far beyond the mere speculation that occurred in the beginning of this decade. Things have changed completely in this corner of the Internet…and for better!

Domain Myth:
All the good dot coms are taken! What is the point…

Domain Fact:
First of all, this could not be further from truth. There are millions of common keyword phrases out there that are of value to the web. Owning one of these phrases as a domain is a smart move, especially since the search engines like Google, Bing and Yahoo put so much weight on the domain name when it comes to ranking in the search results.

Domain Myth:
There isn’t enough money in domain investing to make it worth it…

Domains Fact:
Wow, here is a giant eye opener…the average sale price of domains on the aftermarket is $2,500! Yep, that’s right. The average sales price. If you can sell of a few of these a month, I do believe you would have yourself a lucrative career.

There you have it. A few eye-opening facts about the domain investing industry. Right now, there are many changes taking place in this dynamic investment landscape. What worked for buying and selling domains 5 years ago, no longer apply. There is now a whole new set of rules when it comes to monetizing (making money) with raw domains.

And as for speculation, forget about that. Nobody buys and sells domains on sheer speculation anymore. This is actually good, because it means the industry has matured and developed to a point where revenue and expenses can more easily be tracked and proven to others, thus creating a fair and more educated investment pool. That is why those that understand the RIGHT way to invest in domains are making a killing and will continue to be successful in to the 2010′s.

Role of Business Brokers in Selling Your Business

There is a role for a business broker in selling your business. Basically they will make it happen quicker and often at a better price than you could have received on your own.

There are many reasons to use a business broker when selling your business. The most basic reason is they are in the business of selling businesses. They will market your business and help to get prospective buyers to look at your deal. They will help in setting an asking price based on their knowledge and experience. If they have gone through the certification program their price would be considered expert testimony and therefore is given a great deal of creditability. Keeping the owner from underselling their business or over pricing their company is part of their legitimate function to their client. Since they know how to find buyers who are qualified and ready to deal on a business of their liking, they can help to cut down the time a business has to be on the market. Consistently a business broker will move a business quicker and usually at a very fair price.

What does a business broker do

They can help the seller get the information needed by the buyer to make a decision on buying the business. This role is critical as nothing happens until a price is established and the business facts are known. Presenting the facts in a professional form is another common service that a business broker will give a client. This service can be the difference between a seller making a deal and the deal going south. Professional presentation of pertinent facts about a business is necessary in order to attract potential buyers. It is this factual information that helps buyers make intelligent decisions about such a purchase. Since the business broker does this type of work year round, the information is shown in its most positive form. Practice does make perfect in this case.

The business broker is also the go-between for passage of information between the buyer and the seller. This enables better communication and cooperation between the buyer and the seller. The role of a disinterested third party is effective in letting the business broker move the dealing along on the sale of the business. The business broker must treat both sides fairly as his next clients are given existing clients as references for his work. It is imperative that the fairness issue is communicated to the next client. Since all aspects of the sale pass through the broker, this neutrality is important and also the advice given to both sides of the deal.

Marketing the business

Without a broker, the seller would have to market the property and would not have access to a pool of potential buyers. The buyer would not have access to the pool of sellers the broker has available. This need by both parties is the reason that most businesses are sold with the help of a business broker. Their expertise in helping to set the selling price cannot be overstated. A busy broker over time helps to sell many types of businesses and this real time experience is invaluable to the process coming to completion. A competent broker will also know the legal requirements for many types of businesses that the brokers in a geographical area. This prevents problems that can be prevented from taking place and decisions being made without all of the facts.

If he is not a certified broker as to setting a selling price, he will have referrals to brokers or CPAs that do have this credential. The advantage to the seller is the business will be set at a selling price that can be logically defended when questioned about how the price was set. It is not just a price that the seller picked from thin air of a wish list price.

Broker assisted negotiation

Since the broker will usually know what the buyer is willing to pay and what the seller is willing to accept, the broker can lead both sides to a price that is somewhere in the area that both are willing to live with. Without this outside force, either party may never approach this price.

A broker has another ability to deliver that makes their service worth the cost. Maybe the business is a one of a kind business and not one that comes to market every day. Businesses like this are hard to evaluate as to their market value and even more importantly there may be a need to come up with a unique marketing plan to sell the business. A good brokerage firm can do both and solve the problem with a greater chance of success than the owners of the business could do by themselves. They have access to a network of brokers who handle all types of businesses that are for sale.

The business may be unique in the geographic area it is located in, but there could well be one in another part of the country that was successfully marketed by a broker in that area. Use of the network is exclusive to the broker community and private individuals will not have access to the information that can be obtained from the network. Information is power, and this kind of help may be the only way the business could be successfully marketed. How other brokers sold a similar business can lead the broker in question to come up with a plan that has a good chance to work. This service to the seller is priceless and could make the difference between no-sale and sold. The seller could have wasted a great deal of time and money on an approach that would not work. Ferreting out potential buyers is the name of the game. The wrong approach could easily come up empty. All of this is sufficient reason to employ and expert when selling a business.

Conclusions

The fact that they will actively market your business is plus. The current owner does not have the time or knowledge to find buyers and set a fair price. They will usually set their price too high or too low. If they have a hard time coming up with any buyers, this can bring on frustration and an unneeded reduction of the selling price. It the wrong buyers are seeing the ad for your business, then only a bargain will attract their attention. A buyer who understood your business would readily see the value in a fairly priced offer. This is tricky and the result can be dramatically influenced by hiring a pro to help with the sale.

Another reason for the use of a pro is they can talk the language of professional people the buyers bring into the sale negotiation. If the terms that they communicate in are not understood, the buyer’s advisors will not be impressed and may kill the sale. Hiring the professional business broker can prevent lack of intelligent conversation. He will know the terms and their meanings and be able to give the needed answers to move the sale along. This knowledge and expertise is the reason that such a person should be hired to help you make the sale of your business. Their ability to use previous sales and how they were completed is a facet of their knowledge base. There is no way the current owner could bring that to the negotiating table.