Homepreneurs and small business owners don’t always need to start a business from scratch. Another option is possible: buy an existing business. This may require upfront money, but not necessarily. Seller financing is possible or paying for the business by working for the owner for a pre-determined period. This is sweat equity, basically.
The article below by Anne Field – though written during the height of the recession – still provides many tips and suggestions for buying a business in today’s shaky economic climate. From purchase options to systems integration, Field’s experience is invaluable when considering a purchase. Many businesses will be up for sale as the baby-boomers retire or leave for other reasons. If you can handle the idea of a purchase, Field’s words are sage advice.
Acquisition Time? Tips on Buying a Business
By Anne Field
With the recession hammering business valuations across the board, you’d think small business owners looking to buy a company would be in the driver’s seat, able to get their pick of the litter at bargain basement prices. But, the reality is a bit more complex.
For one thing, with bank lending to small business down, potential purchasers don’t have the access to capital they might need. Then there’s the question of supply. Quite simply, “We see a lot fewer businesses for sale than most people would think,” says Mike Handelsman, general manager of BizBuySell.com, an online marketplace for small businesses. That’s because many company owners have pulled their firms off the market, preferring to wait until they’re more likely to sell at a higher price, according to Handelsman.
That’s what Hanson Ansary, who owns Global Management Services, a 22-employee events planning company, discovered recently. In an effort to expand into other areas in the hospitality industry, he bought two companies earlier this year, including a gaming company and a travel business. . But, according to Ansary, he found far fewer options than he thought he’d have.
In fact, in the case of the travel company, he ended up buying a business that didn’t meet all his original criteria. While he’d intended to purchase a firm that worked largely with corporate clients, he had to acquire one that did mostly retail business. As a result, he figures he’s going to have to spend more resources getting the company up to speed than he’d planned at first.
Still, there are plenty of opportunities, particularly among business owners looking to retire. “Some of them don’t care if they get less for the business than they might at another time. They just want out,” says Handelsman.
If you’re shopping for a company, here are some ideas to take into consideration:
Try seller financing or earn-outs. According to Handelsman, more transactions are being funded by seller financing, through which buyers pay sellers a percentage of the purchase price up front and the rest over a specified period of time, with interest. Another approach is to use an earn-out. In that case, you set certain parameters—usually specific gross revenue, profit margin or net income levels– that have to be met annually for a period of two to three years. Then, you pay the seller a percentage of the total price if those benchmarks are met. Usually, the seller also has to stay on as an employee for a period of time.
Earn-outs are also useful ways to protect against risk. That’s especially important in the current environment, if you’re buying a company with declining revenues. Richard Foster, owner of Foster Construction Management, a 15-employee New Hyde Park, NY company, is in the process of buying a company that recently experienced a drop in sales. To protect himself, Foster decided to finance the transaction partially through an earn-out, through which the seller will share in a sliding scale of profits over a five year period; for the first three years, the seller will remain on staff.
Don’t overlook the importance of integration. For an acquisition to be successful, you need to make sure you can combine the two businesses without too many hiccups. “You can’t expect to just buy another company and fold it in,” says Domenic Rinaldi, managing partner of Sunbelt Business Brokers, a business brokerage firm in Chicago. He advises company owners to “look for the gaps”. That could include anything from different accounting procedures that might not jibe, to an inefficient sales automation system likely to create inefficiencies and slow down operations.
Make sure you thoroughly understand how the economy will affect the future growth potential. For example, the owner of a dry cleaner might decide to buy another firm in a less affluent area, only to discover that residents have cut back on their dry cleaning to save money. In addition, investigate previous cut backs, to ensure your seller hasn’t made significant changes that caused real damage. Similarly, if you’re buying a business that’s experienced a sales decline, “Determine it’s just because of the economy, and not something systemic in the business that has caused business to drop,” says Rinaldi.
Anne Field is a Freelance writer, Business Insider