By Mike Handelsman
Over the past year, historically high levels of unemployment have left record numbers of highly-skilled individuals looking for work. This has caused many to ask themselves if now could be the right time to pursue their dream of buying a business and becoming their own boss.
With corporate jobs less secure and available now than perhaps any time in recent history, buying a small business could be an excellent way for many of these unemployed individuals to take control of their own destiny and determine their own success. Tough economic times have created an abundance of distressed selling situations in the business-for-sale marketplace, meaning business buyers currently have access to great bargains. However, anyone thinking of becoming a business owner must undertake considerable research and self-evaluation before taking steps to turn the idea of buying into a reality.
If the thought of becoming your own boss has crossed your mind and you think you’re ready to make a serious move, consider the following recommendations before going any further:
Analyze Your Strengths, Weaknesses and Lifestyle Needs
While the thought of running a business is exciting and causes many business owner hopefuls to want to buy as quickly as possible, it’s essential to properly evaluate what type of business suits you. When buyers choose the wrong businesses, their entrepreneurial dreams can quickly turn into stressful burdens.
For this reason, you should do a careful analysis of your strengths, weaknesses and lifestyle needs before diving into the buying process. Here are five critical questions to ask yourself before deciding what type of business is right for you, or if you are even cut out to be a business owner at all:
Do I have particular hobbies or interests that I want to make sure are a part of my daily job? If your number one hobby is designing floral arrangements or gardening, consider buying a florist and turning your passion into a career. Business buyers often ignore their interests and look for businesses solely based on what they think will be the most profitable, which can have negative consequences. Money-making potential is important and should be considered, but if you have no interest in what you do, it probably won’t make your life any better.
What are my strengths and skills? Business buyers should not only consider their hobbies and interests, but also their personal strengths, before looking for businesses to purchase. Maybe you’re a skilled writer and communicator, excel at teaching concepts to others, or have a knack for technology. If you buy a business that will allow you to put your strong points to work, it will have a much better chance of succeeding.
Are there any particular times I absolutely can’t or don’t want to work? Are evenings out of the question? What about weekends? If you buy a business that requires a schedule that will complicate your life, the business you thought would make life better will likely do just the opposite. If you’re considering a specific type of business, talk with current owners of similar businesses to get a sense of what their schedules are like. Keep in mind that owning your own business does not necessarily mean you’ll have more free time. In fact, it can mean just the opposite. You should be prepared to handle the long hours that often come with running a business.
Am I comfortable managing people? Do I have any experience with it? Just because you want to be a business owner doesn’t mean you are, or need to be, a “grade A” manager of people. However, if you buy a business that won’t involve a manager on staff to do it for you, you better make sure you’re comfortable with the situation before committing yourself to the business. For example, should a situation occur that is hurting the success of the business, would you feel comfortable confronting employees who were at fault, or would you be more likely to pretend it’s not happening?
What size business do I want? Small businesses can range from zero to around 100 employees, which means that there’s no cut-and-dried small business owner experience. An owner of a five-person company will likely have a very different role and lifestyle than an owner of a fifty-person company.
Understand the Market
It’s not uncommon for new business buyers to enter into the buying process without a solid understanding of the small business market and what they should look for in an investment. These buyers are only throwing nails in the road by being unprepared, and are positioning themselves for hard times ahead.
The moment you identify a business that grabs your interest, you should begin investigating the business and everything surrounding it—from the industry as a whole to the business’s specific competition, marketing efforts, suppliers and so on. It’s important to do this early so that once you contact the seller you’ll know exactly what to ask.
You should also be equipped with the knowledge of what a business in your location and industry of interest typically costs. Web sites such as BizBuySell.com offer tools that allow you to quickly and easily conduct business valuations based on these factors. Whether you’re interested in buying a casual pizza restaurant in Chicago or an auto repair shop in San Francisco, these resources will give you some guidelines for what you can and should expect from a pricing standpoint.
Finally, you should make a point to talk with existing business owners – ideally in the industry you’d like to enter – who can speak from experience and offer invaluable advice on how to approach a purchase for the best results.
While some business buyers feel equipped to go through this process alone, others look to the help of a professional business broker. If you don’t feel comfortable taking a “do-it-yourself” approach, a business broker can make sure you cover all bases and avoid getting burned in a transaction.
Run the Numbers
Before taking serious steps to buy a business, it’s important to know exactly what you can afford and how much income you’ll need from a business every month to live comfortably. Someone who has $500,000 in the bank is going to experience a buying scenario much different from someone who has $20,000.
If you have significant cash reserves that you are willing to put toward financing the business, you won’t have to worry as much about securing financing for the business through a bank, which these days can be very difficult. If you’re not lucky enough to be in this situation – like most – it would be a good idea to focus on pursuing businesses for sale that offer seller financing.
Seller financing – when a business seller agrees to finance part of the sale, with the buyer agreeing to pay them back with interest over time – has become a crucial element of business-for-sale transactions during these tough times. In many cases, seller financing can also be more advantageous to buyers because it helps ensure that sellers will remain interested in the success of the business after you take over. Your success is directly related to your ability to pay them back.
With that in mind, most buyers today would do well to search specifically for business listings that indicate seller financing is an option. Since bank loans are so hard to come by, these are the opportunities most likely to pan out.
Narrow Down and Negotiate
If you’ve done your initial due diligence and have determined that buying a business is the right decision for you, it’s time to narrow down your options. Pinpoint the top three or so businesses for sale that most appeal to you and carefully weigh the pluses and minuses of each. Is one located more conveniently to where you live? Does one seem to have a longer track record of success and a more established customer base? This will make it much easier to come to an informed, justified decision on which business you should pursue.
After you correspond with the business seller and get serious about going through with a transaction, you’ll enter into a negotiation process. Since the down economy has created a distressed selling situation for many sellers, the time is right for you to be able to negotiate a great deal. This is when it pays to have a comprehensive understanding of business valuations and the knowledge to ensure you can arrive at a number that’s fair and that you’re comfortable with.
Once you reach a pricing agreement with the seller and progress to the stage of an accepted offer, there’s more due diligence to complete. This period, the financial due diligence, typically lasts from 10 to 30 days and allows you access to all of the company’s books and records. Review them carefully, and if you’re working with a broker, make sure they clearly explain to you the implications of all of the information.
It’s a buyer’s market, so if you approach your entrepreneurial dream with the right amount of careful consideration, buying a business could prove to be a realistic alternative to the job search.