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Choosing to Buy a Business

Written by: George J Sierchio

Article Overview: Buying a business can be a complicated process. This is not at all like buying a house. You must be mentally prepared and committed to purchasing a business before you even bother looking. A plan must be made to fit your business objectives. When the right opportunity comes up, it is best to move swiftly, which can only be done if well prepared. There are a few main reasons to buy a business versus starting scratch. There are also pitfalls, skills and general points to know about before taking this leap. This article will give you that knowledge and allow you to make the most out of your decision to purchase a business.

Choosing to Buy a Business

Buying a business can be a complicated process. This is not at all like buying a house. Facts such as location, age, industry and your experience all play a part in making the purchase of a business complex and difficult to compare to other similar businesses. Even more so, the seller’s mindset and reasons for selling as well as their importance to the business will complicate things and be a variable concerning the value of the company.

I am in no way trying to discourage you from buying a business, but I am letting you know that things are not cut and dry in this type of transaction. You must be mentally prepared and committed to purchasing a business before you even bother looking. A plan must be made to fit your business objectives. Are you looking for a business based on the industry, cash flow, price, size or other factors you have determined important to you? When the right opportunity comes up, it is best to move swiftly, which can only be done if well prepared.


Why would you choose to buy an existing business instead of building one from scratch?

Expansion
If you are in the position where you already own a company and you are looking to branch out into a new market or add a new product/service mix to a current market, buying a business is a good idea. That is, if there is a viable competitor that exists and is willing to sell. Checking with area business brokerages and also making a list of competitors to solicit an offer to is the way to go.

Momentum
Buying a business is a great way to begin a new business venture with a running start. As long as the business is making money, you can continue operating it as it has been prior to making major changes. I highly recommend not changing much at all in a profitable business until you have had enough time to find out where you can make changes. Coming in like gang busters is never a good idea. There may be very particular reasons why certain things happen in the business the way they do and a change without knowing this could blow up in your face. Additionally, making swift changes could also disrupt your employees causing problems very quickly.

Opportunity
Sometimes being a bottom feeder is not a bad thing. That’s the term used for those who choose to look for viable business that are running at a loss or recently closed shop. These could be businesses that will never do well due to location but have the inventory and equipment you could use in an existing business or use at a very good location that is available to you. They could also be perfectly good businesses that the current owner has let slip because they are not interested any more or because they just can’t cut it as an owner. In these cases, your skills would be the key that is currently missing and will quickly turn the business around. Obviously any entities fitting these profiles can be bought at a bargain price.


Know why you want to run a business and what your skills are.

Pitfalls
A bad reason to purchase a business is to actually buy yourself a job. Buying a job will quickly turn into a very ugly scene to those involved in your business, as well as family and friends, when you are not making the money you need to survive. In many instances, you will be making less money than you were as an employee elsewhere. It takes time to build up enough cash flow to take a consistent and fruitful salary, especially when you need to pay off business loans. True entrepreneurial spirit will get you through the lows and make the highs an even greater experience.

Another pitfall to buying a business is funding. Money becomes an issue very quickly when you purchase a business. You are laying out much more money up front than when you are starting from nothing. You can’t just quit. This brings with it a tremendous amount of drive for many people to pay back the money or get it back into their savings account. But it also brings about a tremendous amount of stress knowing you owe a lot of money and may be stuck. Also, be aware that you will most likely need some reserve funds when you take over a business for dips that often initially occur. One of the main reasons for business failure is lack of capital.

Skills
When you build a business, you learn about the various aspects of operating a company and dealing with employees as they come. You may develop the skills necessary to deal with them or realize you need help. When you buy a business these things are already there and you will be relying on skills you may not have.

For example, if the previous owner was the main salesperson and you do not have these skills, you will be in big trouble very quickly. Many people make the mistake of starting or buying a business that is in the industry they know well regarding technical issues, such as making a widget or stocking a store. What they don’t realize is that there is a lot more involved with owning a company than there is with just being an employee.

Business Breakdown
Every company has 3 main parts to it; Technical, Sales & Operations. It is very rare for an owner to have all 3 of these skills. The importance of realizing that these aspects of a company exist, and which aspects you actually have experience with, is incredible. It will immediately affect how well you do with your new business. You need to already know who will be handling the areas that you do not have the background in, especially if they were occupied by the former owner.

Are you coming from the world of big business?

I really think it is important for me to point out that the small/medium business world is a much different place than big business. If you are getting into your own business after only knowing what the big corporate world is like, you are in for a huge shock. Traditional courses taught in an MBA program, other than some Entrepreneurial courses, are not going to help you in most situations. Also, the skills gained in running a department are not going to cut it either.

There are no department budgets here and there are very little separations from the owner and the low man on the totem pole. At first, you will be doing a lot of things you might have normally considered to be “not my job”. Every dime coming in and going out is yours and your ultimate responsibility. You will most likely know every employee and a lot of your suppliers very well making things very personal. Decisions are made very quickly in this arena, there is very little time for wasteful meetings. Be ready for the ride of your life.


A Few Final Thoughts
Hopefully I did not discourage you from wanting to own your own business or for taking the path to buy one. My point is that owning a company is a great experience but it really isn’t for everyone. Even if you have all of the above points covered in your reasoning for buying a business and plans to deal with issues that are new to you, you may not like it.

Seek help in preparing yourself to buy a business, finding a business, determining if it fits your criteria and determining if the price is right. I recommend using a business advisor, business broker and accountant to help you. Bring in the attorney when you are fully prepared to go to contract and purchase the business.

Best of luck in your business buying endeavors!

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Article Tags: business pitfalls, buying a business, purchasing a business



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