By Paul Long
May 15, 2019
Starting a business can rewarding, but can also be a lot of work. Many entrepreneurs look to purchase an existing businesses as an alternative. When you purchase an existing business it gives you the foundation that someone else built (operational processes, inventory, client base etc.) but you can grow the business further once you acquire it.
With baby boomers retiring over the next few years you will see a large increase in businesses being for sale. As a commercial lender, I have seen a large increase in these types of deal come across my desk. Some are very small businesses for $30,000 and some are massive operations of well-known businesses that you would recognize for Millions.
One question that I get asked often, is what business should I buy? There are two answers to this question.
- One that you have experience in.
- One that makes money!
One that you have experience in– Having the experience in the industry that you are looking to purchase a business in will help you in a big way. Many business owners get into a business because it was a hobby or something they enjoyed. So if you fix cars on the side and made some side income, then maybe it’s time to go full time and purchase an Auto Repair Shop. One important thing that I see often is that business owners are great at their trade, but poor when it comes to running the actual business. One of the risks you need to consider is do you have the support system around you to assist you in running a successful business (CPA, Bookkeeper, Banker etc.)
I also believe is important that you find a business broker to work with, they can help you find the best business for your expectations. There are also franchise brokers out that work with all of the major franchises such as McDonalds, Meinike Car Care, Grocery Outlet and many other top quality company’s. One of the major benefits to purchasing a franchise (new or existing) is that you have a franchisor that has a vested interest in you succeeding (because they receive royalties and you carry their brand name) and can provide the operational support and structure. Also some of these franchises don’t require the owner to be in the shop 24/7, so you can truly buy it as an investment.
One that Makes Money– I don’t know very many people who want to buy something and not make money on an investment. Either you want to grow it in order to eventually sell it, or you want to create an income for yourself. It is your job as a potential business owner to make sure the business generates enough money so you can make a living. Many business owners who sell their business will give you there financials when you have an active purchase and sale agreement in place. Working with your CPA, Business Broker and Banker is an important step to determine what the businesses “Seller Discretionary Earning” is for that business.
Seller Discretionary earnings is defined as: Earnings that are pretax and pre-interest profits before non-cash expenses, owner’s benefits, one time investments, and any non-related income or expenses. In addition, Seller Discretionary Earnings may require that expenses be adjusted if a new owner will necessarily need to take on a new expense. Example includes a new debt payment.
There was a customer that I worked with previously that was in the process of purchasing a business and the numbers looked good. But when the buyer started to “peal back the onion” things didn’t make since, in this case the sellers were selling because they were losing one of their largest clients that consisted of 50% of the businesses income. Obviously they backed out of that deal. This is why you need to work with professionals to make sure the business can provide you with what your goals you are seeking.
How to finance a business– Generally speaking as a commercial lender the best product to purchase a business is using an SBA loan. SBA loans are good for business acquisitions because an SBA loan cannot be turned down for lack of collateral. For example, you purchase an Auto Repair business for $500,000 and there is $50,000 in equipment. So what is the rest of the $450,000 that you are buying? It’s called Goodwill or Blue Sky, this usually consists of the client list, a do not compete from the previous owner etc. Goodwill is almost impossible to finance unless it is fully secured by hard assets (real estate etc.) or by an SBA Loan. If you would like more information about the SBA loan program or check out my Guidelines for Acquisition Financing at https://paultlong.com/buy-a-business/
SBA loans are generally 10 year loans with market interest rates. In many cases you can acquire the business for 10% down. There are other alternatives available to purchasing businesses, ask your banker or financial adviser for more information.