Buying Your First Business
Capitalize on the Silver Tsunami, and other ways to acquire a business
By now you’ve probably seen the term ‘Silver Tsunami’, referring to baby boomers leaving the workforce. Alongside that is the fact that boomer business owners aren’t likely to pass their business over to their children. There are numerous reasons for this, but at the end of the day what’s important is that this creates an opportunity for you.
Many, if not most of these business owners need to sell the business in order to retire. Their only other option is to keep working until they die.
BizBuySell and Bizquest
These are classifieds website for selling a business. Nothing complicated about it. Owners list their business, give you some details about what they do, what their costs are and what their revenue is. Enough information for you to see if it’s worth your time to investigate.
Just Ask
Approaching an owner that is of retirement age and asking if they have an interest in selling is always an option. If the business you’re looking for isn’t advertised as for sale then come up with an offer. Even if they aren’t ready just yet, maybe they’ll keep you in mind for the future. Or maybe you can work something out where you can start working with them to learn the business from the inside out before they’re ready to pass over the reins.
This approach requires tact. You don’t want to insult the owner by implying that they are too old to be working. They might have plans to sell in the future. Conversely, they might not have even thought of selling.
Business Brokers
If you don’t like what you’re seeing on websites like BizBuySell, you can talk directly to a Broker. They act in a similar manner to Real Estate brokers, helping you find the business you want, going over the books and helping to negotiate the deal. Like a RE broker, they take a commission from the sale. I won’t encourage nor discourage the use of a Business Broker. They’re not strictly needed, however, if paperwork and contracts are a weakness for you, then a broker will be valuable to you.
Keep in mind that if paperwork is a weakness then you may not be ready to own a business,
Franchise
A quick word on franchises. There's a ton of them, and not all are good. On one hand much of the work has been done for you. Image, product, advertising and business plan. On the other hand you are limited to the products and services offered by the franchise and have to pay fees to the parent company. For the larger franchises this can work out well. Many of the smaller ones are barely more than an MLM. Really dive into the books and study the franchise before jumping in.
Buying, Financing and Taking Over
Determining if the business is worth the price
Like in sales, the seller will do their best to pump up the price. You’ll want to check the books for yourself to verify things. This includes the tax returns. Don’t be afraid to have your accountant look over the numbers if this isn’t your area of expertise.
Rule of thumb is that you want a 3-5 year return on investment, ROI. Meaning that if you pay cash for the business, you make your money back within three to five years. Beyond that the business is usually overpriced.
Seller Financing
This is exactly what it sounds like. Rather than go to a bank for a loan you negotiate with the seller for terms. This can be anything from putting a % down and making a monthly payment to the seller keeping an ownership stake-and thus a % of profits-until paid off.
The terms of this are entirely between you and the seller. Make sure to do your due diligence here. You could end up with a really good deal or you could end up with a loan shark quality contract.
SBA loans
SBA loans are specifically designed for you to buy a small business. They come with certain rules however. The first of which is employees. The business you buy has to have a minimum number of employees to qualify. They’re not going to help you finance a 1 person operation.
Additionally, you’ll have to create a business plan. You show the SBA what the current owner is doing, then create a plan for what changes you will make. How you will cut costs and, more importantly, how you intend to grow. What changes will you make to marketing, what new services or products you will introduce, and how much growth you can expect from this.
You want to have a plan that will grow a minimum of 10% each year. Do not fake this or try to bullshit them. It’s possible, even likely, that your plans won’t work. Reality has a say and until you get into the business you won’t know what changes will work immediately. But your business plan still needs to be realistic and honest.
You will be required to put in a down payment, typically between 10-15%. The SBA wants to make sure you have skin in the game. One nice thing about this is that part of your loan usually includes operating cash, meaning that you won’t be totally broke on day 1.
Handing over the Business
Unless you have a close relationship with the previous owner, or even if you do, put a time frame on the hand over. Often, as part of the sale, the owner will agree to stay on and teach you how to run your new business. This is important. You need them to show you how they were doing things, then later you can keep what you feel works, and update anything you feel is outdated. If it’s a boomer business owner, odds are they aren’t using a lot of technology and might be doing things in an antiquated way. That doesn’t mean you shouldn’t learn their way. They’ve been in business this long for a reason.
However, it is a bad idea to let the previous owner stay on in any kind of fashion once this training period has come to an end. If you’re keeping the previous employees, they will constantly be going to the previous owner and undermining you. They may not even do it intentionally, but just through force of habit. Likewise, it takes a lot of determination and grit to own and operate a business. That owner is going to think their way is the right way to do things and may balk at any new practices you put into place. They will point out anything they feel you’re doing wrong because they wouldn’t do it that way, and their way is right. You can glean a lot of good insights from the way they used to do things, but don’t be afraid to forge your own path.
Keep this in mind if doing owner financing. You need to establish clear boundaries, in writing. Otherwise you’ll become a glorified employee.
Speaking of Employees
There’s a lot of controversy over this one. Whether to keep the previous employees, or start over fresh. With a lot of smaller businesses, you may not be able to let go of the whole crew, run your new business, and train up new employees. So, odds are you’ll be sticking with the old employees. That’s fine, as long as they also don’t balk at learning to do things a different way. If they give you too much resistance, don’t be afraid to let go of one or two and have the rest train up the new hires. Then as you continue if any further issues pop up with the previous employees, you’ll have new people in who can train more new workers in the way you want things run.
If you are able to get an entirely new crew, sometimes it can be preferable. You’ll have fresh, eager employees ready to make their mark and you won’t have to fight over what the old owner ‘used to do.’ It can be really tough to work past the expectations of the previous work crew, which is why a brand new batch of employees can be beneficial.
There are Businesses out there of all sizes for you to get started in. You don’t have to jump into a major acquisition. Look around, find something that fits your skill set and budget, and give it a try. Once you get an understanding for the space you can always scale up or acquire a new business.