Tips from Sunbelt's "Buying the Right Business Right"

 
WHY INVEST IN AN EXISTING BUSINESS?

The business brokerage profession generally holds that 20% of businesses are for sale at any one time and of those, 20% will eventually sell. Using our numbers, that means that there are 1,100,000 businesses for sale and of those, 220,000 will sell. With this many businesses for sale, there must be a right business for you!

1. Get another job.
2. Start a business.
3. Invest in an existing business.

Obviously, we think the third alternative is the best. Let's consider each alternative.

Get another Job
If you have the necessary skills, and you are not too old (not politically correct, but true), you might be able to get another job. You might even find one that will provide an income sufficient for your family. However, there seems to be no end to the downsizing trend. Even if you find a job, you may very well be back in your current situation in a very short time. Job security is definitely a thing of the past!

Start a Business
This is scary, and it should be! Once again, there are many different statistics regarding business start-ups, but everyone agrees that over 50% of new businesses fail within the first year. Why take such a chance with your future and the future of your family? There are many unknowns in a start up. How much capital will be required? How long will it take to open for business? Where will you find employees? Can you get the necessary permits? Can you find the proper space for your business? How long will it take to get the income up to a point where you can start taking a salary? Etc., Etc., Etc.

We have a solution to the dilemma…

Own an Existing Business!!!

There are eight significant advantages to investing in an existing business versus starting a business.

1. You can review actual operating results rather than projections. If a business has been owned and operated by the same owner for a number of years and if that business has been the source of income for his family, you can be reasonably sure that the business is profitable and viable.

2. Immediate cash flow. No expensive advertising to lure customers - the cash register starts ringing the first day you take over, just like it did the day before for the seller of the business.

3. Trained employees in place. When you take over the business, you will have a complete crew of trained employees to run the business. No down time for training and no customer dissatisfaction with untrained employees.

4. Established suppliers and credit. For the most part, the existing vendors will continue to do business with you without missing a beat. Remember that they have been supplying the business for a while and they know it is a good business. They don't want to lose your business, they want you to succeed and buy more goods and services from them!

5. Established customers and referral business. Your customer base is already in place and it will, through referrals, continue to grow - unless you drive them away.

6. Existing licenses and permits. In many cases, all you have to do is transfer the licenses and permits to your name. In those cases where you have to re-apply for a license or permit, you have the comfort of knowing that the business, in its current location, was approved for the license or permit (for example, a liquor license for a restaurant).

7. Training by the seller. In addition to the trained employees, you will receive training from the seller in how to operate the business. You will be introduced to customers and suppliers and will get the benefit of the seller's extensive experience in running the business. You will not have to make the same mistakes the seller made!

8. The availability of owner financing. Over 90% of the businesses sold by Sunbelt Business Brokers are financed by the seller of the business. This may be the single most important advantage of investing in an existing business. The seller who finances your investment of his business has a vested interest in your success.

Clearly, the best solution to finding a way to provide for you and your family is to invest in an existing business. Another good avenue is the investment of a franchise. However, franchises are generally more capital intensive that the investment of an existing business. Most existing businesses are able to be owned with an initial investment ranging from 15% to 50% of the total investment. In start-ups and franchise investments, the cash requirement can reach up to 100%. Even when financing is available in these situations, the terms and conditions of the third party financing are generally much more stringent than the terms offered by the sellers of privately owned businesses.


FUNDAMENTALS OF INVESTING IN AN EXISTING BUSINESS

• Invest in a business you like.
• Don't expect "traditional" financial information from the owner of a privately owned business.
• Tax returns of a privately owned business are prepared to show as little income for tax purposes as possible.
• You and the owner of the business should like each other.
• Commercial banks won't lend you the money to invest in a privately owned business.
• The owner of the business should finance the purchase.
• Don't take yourself out of cash - you will need reserves.
• You must make an "offer" before you have seen all of the financial and other business records of the business you are interested in buying.

Invest in a Business you like…
Many business buyers think the most important quality in a business is profitability. Certainly, you want a business that will have sufficient earnings to provide for you and your family. BUT, you will risk making a terrible mistake if you do not INVEST IN A BUSINESS YOU LIKE.

Suppose you find a septic tank cleaning business that makes lots of money and can be owned by you for a reasonable investment with great terms. Unless you want to pump septic tanks, the fact that the business makes lots of money is of no importance at all. If you invested in this business because of the income, you will spend long, miserable days in the business and will end up neglecting the business and selling it later at a loss.

When you think about investing in a business, think about what you like and don't like. If you fix on a particular type of business, visualize yourself running the business. Visualize taking your friends and relatives to see your business. Do you like what you see? Will you be proud to own the business? If not, or if you are not sure, don't invest in that type of business.

Be Flexible
You will have to be flexible in finding a business. If you lock onto only one type of business, it will take you much longer to find a business to invest in. We like to start a pre-owner thinking about what they like and don't like using the following broad categories of businesses. First decide if there are any categories that you absolutely do not want to be in. Then focus on the remaining categories and review the characteristics of these categories as presented below.

• RETAIL
• SERVICE
• MANUFACTURING
• DISTRIBUTION
• RESTAURANT
• LOUNGE
• COIN OPERATED BUSINESSES

As stated, this is a very broad classification of business. It is, however, a good starting point. Review these personality characteristics for each classification and see how you fit:

Retail

• Deal with the public (outgoing personality required)
• Long hours
• Open six or seven days a week
• No break for holidays

Service

• Deal with the public (outgoing personality required)
• Must maintain quality
• May need special training
• May need to keep "emergency' hours

Manufacturing

• Don't deal directly with public
• Deal with many employees
• May need special training
• Shorter hours

Distribution

• Don't deal directly with public
• Deal with many employees
• Shorter hours

Restaurant

·         Deal directly with public

·         Must be a taskmaster (manage and supervise closely)

·         Long hours

·         May have to handle difficult customer problems (drinking too much!)

Lounge

• Deal directly with the public
• Long hours
• Must be a taskmaster (manage and supervise closely)
• Will have to handle difficult customer problems (drinking too much!)

Coin-Operated Businesses

• Long hours
• Will have to handle difficult customer problems (loitering is common)
• Few employees
• Lots of cash on hand

In addition to personality characteristics, you need to consider the work abilities required for each category:

Retail

• Sales
• Merchandizing (selection and presentation of merchandise)
• Advertising

Service

• May require special technical skills
• Advertising

Manufacturing

·         Good with numbers (control costs)

·         May require special technical skills

Distribution

·          May require technical knowledge of products

·          Sales Restaurant

• Food preparation and service
• Sales
• Advertising

Lounge

• Drink and possibly food preparation and service
• Advertising
• Promotion

Coin-Operated Businesses

• Helps to have ability to fix machinery

Once you have selected a primary category, you can begin to look for a business in earnest. You will find many different businesses within each category that share the primary characteristics of the broad category. You will then have to "fine tune" your selection. For example, within the retail category, we have clothing stores, shoe stores, boutiques of all types, bicycle shops, etc. Within the restaurant category, you can choose from full service restaurants to ice cream stores. JUST BE SURE YOU LIKE IT BEFORE YOU INVEST IN IT!


WHEN YOU INVEST IN A BUSINESS, JUST WHAT EXACTLY DO YOU OWN?

In almost every situation you encounter, you will be (and should be) investing in the assets of the business. There may be instances where the seller wants you to be the stock of the corporation he owns, which in turn owns the business. The primary reason for the seller's desire to sell stock is TAXES, DREADED TAXES!

Most privately owned businesses are owned as sole-proprietorships and some are limited liability corporations and partnerships. Simply put, sole-proprietorships, and partnerships are taxed as if the income went directly to the owner. Whatever income the business has is divided up among the owners and the owners file a personal tax return and report their share of the income on their personal tax return.

For many reasons, you do not want to invest in a business by owning the stock of the corporation that owns the business. First, the corporation is an entity unto itself and it may have liabilities that you are not aware of. If you buy the stock, you also own these liabilities. Second, you will not be able to depreciate your investment. Substantially all of your investment will be allocated to basis in the stock and you will have to wait until you sell the stock to deduct the cost of the business.

You will seldom run into the stock sale scenario when investing in a business with sales of less than $1,000,000.

So, if you are investing in assets, exactly what assets do you own?

You will be investing in the inventory, furniture, fixtures and equipment, goodwill, trademarks and trade names of the business. Unless you specifically agree otherwise, you will be owning these assets "free and clear" of any liens and mortgages. Although you may agree to assume an existing debt as part of your purchase, you will generally not be assuming any of the existing liabilities of the business.

What about the cash and the accounts receivable? Put yourself in the shoes of the owner of the business. The cash and the receivables were the result of sales made by the owner before you purchased the business. The owner thinks, and rightly so, that the cash and the receivables belong to him. Also, the owner has to pay the existing accounts payable and other current liabilities and the cash and the receivables will probably be used for this purpose.


HOW TO FIND A BUSINESS?

You know that you want to invest in an existing business, you understand what you are going to be owning and you understand what to expect in the way of financial information about the business. But, how do you go about finding a business to own?

There are four primary ways to locate a business to own:
1. Visit a Sunbelt business transfer specialist in your area.
2. Read the Sunday classified advertisements for business opportunities and businesses for sale.
3. Visit our site on the World Wide Web at www.sunbeltnetwork.com.
4. Referrals from business owners.


UTILIZING THE SERVICES OF A SUNBELT BUSINESS TRANSFER SPECIALIST

The reasons are clear; why you should contact your Sunbelt Asia business transfer specialist today, see what opportunities are available in Thailand, USA and Canada… +66-2-642-0213.


For more information please contact us at request@sunbeltasia.com