OT: Buying a Business

[Huckleberry]

For over ten years I have read this blog and 100% trust the expertise of piggs…

I have recently been laid off (Qualcomm) and am now toying with the prospect of purchasing a well established business. I’m pretty fed up with working for “the man”…

Has anyone else purchased a business?

How do you find quality businesses for sale?

How do you execute good due diligence to ensure you’re not having the screws put to ya?

Whatever advice you may have is welcomed!

[XBoxBoy]

While I haven’t purchased a company, I’ve started a business and grew it to 15 employees.

My biggest suggestion would be don’t go into a business that you don’t know anything about. For instance don’t open a restaurant if you’ve never worked in or run a restaurant. Every business/industry has its own special considerations and not knowing anything about the business makes success far less likely.

Second, don’t go buy any business that is sexy. For instance, creating new solar tech is sexy. Installing solar panels is not. I have a close friend that purchased a small temp personnel agency. She’s done well with it. Another friend (well probably more aquaintance) purchased a uniform supplying business and did well with it.

Also why buy a business? Why not start one? Often it’s much cheaper. Keep in mind, someone selling a business has lots of insider information and they want out. Why?

And lastly, while I can understand you don’t like working for “the man”, don’t for one minute think that running a business is the ticket to easy street. And if you’re hoping that it will be different because you’ll be in charge, let me disabuse you of that notion. You will not be in charge, your customers will be in charge.

If you get farther along, I can post a bit about pricing a business which is a whole other subject.

XboxBoy

[joec]

Running a business is extremely difficult IMO. With a lot of people having a similar mindset to you, competition is extremely fierce whatever you choose to do since lots of people would “like” to be their own boss.

As someone who is NOT a successful business owner, I think unless you have an exact advantage (parents, worked in that area and have special insight, connections, etc…), don’t expect it to be fun or easy. Also, do you have kids/wife? Those things take you away from work and makes you less competitive. Why do you see so many startups started by young college drop outs? They can work non-stop, are young/healthy, very little to risk/lose, have wealthy parents a lot of times to support their business, etc…

Most businesses end up failing for a reason and it’s hard to get a mortgage being self employed also for good reason.

Another downside as a business owner is a lot of times, you don’t have the time to do everything so half the time, you are trying to do the work, but should, instead be figuring out where the whole industry/market should go and spend all your time on that.

Your desire is also one reason I tend to support NOT paying off mortgages or things like that (student loans) early. You may need tons of capital…to live off of while figuring things out and to start a business.

As XboxBoy mentioned, you also have to ask why someone would want to sell the business to begin with? The best businesses are ones setup to run itself, but if it did that, they won’t sell or it’d be very expensive. Even a simple franchise can run over a few hundred k to even start (and you are dependent on how great that startup concept is).

I actually have someone in the family trying to sell a business with no takers since it requires them (or someone) to work there full time.

Lastly, I think the amount of work required to make most businesses successful is more than any job so in my current state of mind, I’d be very happy working for the ‘man’.

That said, the “easiest” business is probably consulting in your field of expertise, but that’s probably not specifically what you are looking for and that may only work for certain fields.

– Confessions of a “non” successful business owner.

[flyer]

Do you have any contacts that would enable you to develop a business related to your background?

I’ve had aviation related businesses (plane and helicopter leasebacks, consulting, etc.) which worked out well because of my contacts in the
field–however, this was not the primary source of my income–so that is also a consideration, because of the risk involved.

Others have given excellent feedback, and I’m sure you’ll get more. Just be careful not to act in desperation. Depending on your financial situation, perhaps taking another “day job” might be wise until your path for change is clear. Also, have you considered franchise options?

[Coronita]

If you don’t mind, what sort of business are you thinking about?

Sorry to hear about being laid off. But often times, it ends up leading to something even better in the future.

[njtosd]

When you buy a business you may (or may not) receive the following assets: client lists, accounts receivable, trademarks, patents, trade secrets, copyrights, a corporation, right to assume a lease, inventory, etc. etc. You may also receive the liabilities of that business (accounts payable, other debts, liability to a lawsuit, employment contracts, etc.) some of which would be very hard to find out about unless you were given unlimited access to the business records. Has the business been paying workman’s comp and unemployment insurance? Failure to do so in CA can give rise to criminal liability.

Make a list of what you believe you are receiving. If it’s accounts receivable, get an accountant to look at the books. If it is a corporation – get an attorney who specializes in corporate law to let you know whether the corporation is in good shape (taxes paid, filings done, etc.). Same with IP (this is a big issue for a tech company) – everyone says they have something that is “proprietary” but few can tell you what they actually think that means. Make sure you can assume the lease – whatever. Then, think about all the possible liabilities. You need to know why someone is selling – and they often aren’t going to tell you.

Often, you aren’t really getting much. And if you find out that the seller wasn’t up front, your only recourse is likely to be litigation. If the owner has moved to Montana that’s going to be expensive. I agree with an earlier post – why not start from scratch?

If you do decide to buy the business be sure to work with an attorney. S/he will probably tell you to include in the contract of sale a very detailed and lengthy list of what you are getting and have the seller warrant that s/he has an unencumbered right to transfer those assets to you. Your attorney will probably recommend that have seller makes a lengthy list of any and all possible claims that might be brought against him/her or that have been threatened. (Not legal advice by the way.)

[Hobie]

” Well established business” A rough rule of thumb is you will retain 1/2 the current clients after an owner change. Especially if it is a working owner situation.

Another huge asset is the company’s supplier list. Perhaps the single most undervalued asset to a buyer. You may be lucky and piggyback on some long time very loyal suppliers with great pricing.

Go talk to their competition, current clients, employees, etc. This will help you more than you can imagine.

All the good advice given here. Consider hanging your own shingle vs. buying ongoing. You can buy a lot of equipment and ‘experience’ for the amount of goodwill many owners ask for. Remember goodwill in the eyes of the owner is very biased and all too often way overvalued. Many just fed up with all of the hard work and want to exit and retire in luxury.

Term of sale is another issue to be explored more in detail as you go along. This is huge. njtosd has hit excellent points and I may add the cash flow and payments are crucial as well.

Try to tie payments of goodwill to retention of current business. This will usually include owner working for you. This is another can of worms, but necessary.

Probably best advice is to trust your gut feeling.

One more thing, there are a lot of perks for working for the man. Insurance, medical, 401k, etc. This stuff gets expensive on your own. Just keep it in mind.

[njtosd]

[quote=Hobie]” Well established business” A rough rule of thumb is you will retain 1/2 the current clients after an owner change. Especially if it is a working owner situation.

Another huge asset is the company’s supplier list. Perhaps the single most undervalued asset to a buyer. You may be lucky and piggyback on some long time very loyal suppliers with great pricing.

Go talk to their competition, current clients, employees, etc. This will help you more than you can imagine.

All the good advice given here. Consider hanging your own shingle vs. buying ongoing. You can buy a lot of equipment and ‘experience’ for the amount of goodwill many owners ask for. Remember goodwill in the eyes of the owner is very biased and all too often way overvalued. Many just fed up with all of the hard work and want to exit and retire in luxury.

Term of sale is another issue to be explored more in detail as you go along. This is huge. njtosd has hit excellent points and I may add the cash flow and payments are crucial as well.

Try to tie payments of goodwill to retention of current business. This will usually include owner working for you. This is another can of worms, but necessary.

Probably best advice is to trust your gut feeling.

One more thing, there are a lot of perks for working for the man. Insurance, medical, 401k, etc. This stuff gets expensive on your own. Just keep it in mind.[/quote]

The supplier thing is a good point. My daughter is starting a small business for which she needed grommets of a certain size and finish. It took a lot of work to find what seemed to be a simple item in the quantity that we needed. There were 4 or 5 things like that – it took a couple of months (very part time) to find everything she needed.

The goodwill issue is particularly relevant to trademarks. You can’t receive assignment of a trademark unless you also receive the “goodwill appurtenant thereto” Failure to get the goodwill can invalidate the mark.

If you are thinking about a software company you should have a working understanding of copyright and patent rights as they relate to software. Lots of confusion about shareware, “creative commons” licenses, open source software, etc. The potential liability for infringing a registered copyright in software is enormous.

I could go on, but I will leave it with a warning to be careful.

[Hobie]

[quote=njtosd]Failure to get the goodwill can invalidate the mark.[/quote]

Wow! I had no idea. Never again will I quibble about attorney fees 😉

You also have to ask yourself, “Are you good at sales?” Gotta feed the beast! Put a lot of weight on how you will generate new business and what you will do to keep up with changing times ( technology or maturing market)

[zk]

I’ve never owned a business, but I’ll tell you about two good friends who have.

Xboxboy’s advice all seems very solid, and the part about “sexy” applies to the first example. A friend bought a business that bought waste grease from restaurants and sold some of it to…I don’t know, whoever uses used grease. Very unsexy. Disclaimer, he was doing ok before this, and he might’ve paid a lot for the business, but a couple years after he bought it, he moved from Carmel Valley to Rancho Santa Fe, so it was working out for him.

Another friend started a restaurant. We’ve all read that most restaurants fail within X amount of time. I’ve read that that’s usually because the owner gets tired of working hard 100 hours a week. My friend worked those 100-hour weeks for about 5 years. He had previously managed a successful restaurant for years, and he had also owned several pizza joints, so he had lots of knowledge. He started his own restaurant, and he worked, and worked hard, all day every day for about 5 years. He wasn’t making any money at all. He had to borrow money from his brother (a partner in the restaurant) just to pay his bills. Finally, he gave up. This guy was an extremely hard worker, and he had lots of knowledge. But he couldn’t make it work. He wasted 5 years of his life and a significant chunk of his life savings on that restaurant and got nothing out of it.

[Coronita]

[quote=zk]I’ve never owned a business, but I’ll tell you about two good friends who have.

Xboxboy’s advice all seems very solid, and the part about “sexy” applies to the first example. A friend bought a business that bought waste grease from restaurants and sold some of it to…I don’t know, whoever uses used grease. Very unsexy. Disclaimer, he was doing ok before this, and he might’ve paid a lot for the business, but a couple years after he bought it, he moved from Carmel Valley to Rancho Santa Fe, so it was working out for him.

Another friend started a restaurant. We’ve all read that most restaurants fail within X amount of time. I’ve read that that’s usually because the owner gets tired of working hard 100 hours a week. My friend worked those 100-hour weeks for about 5 years. He had previously managed a successful restaurant for years, and he had also owned several pizza joints, so he had lots of knowledge. He started his own restaurant, and he worked, and worked hard, all day every day for about 5 years. He wasn’t making any money at all. He had to borrow money from his brother (a partner in the restaurant) just to pay his bills. Finally, he gave up. This guy was an extremely hard worker, and he had lots of knowledge. But he couldn’t make it work. He wasted 5 years of his life and a significant chunk of his life savings on that restaurant and got nothing out of it.[/quote]

I am guessing the used grease is to make biodiesel

[zk]

Biodiesel. Could be.

I said he bought it from restaurants. What I meant was, restaurants paid him to haul it away, and then he sold it. Not sexy, but pretty sweet.

[njtosd]

[quote=Hobie][quote=njtosd]Failure to get the goodwill can invalidate the mark.[/quote]

Wow! I had no idea. Never again will I quibble about attorney fees 😉

You also have to ask yourself, “Are you good at sales?” Gotta feed the beast! Put a lot of weight on how you will generate new business and what you will do to keep up with changing times ( technology or maturing market)[/quote]

Trademarks (like supplier lists) are an underappreciated asset. By some estimates, the Apple brand (which is basically its trademarks) is worth ~$124 Billion. Google is worth about $40-45 billion. There may have been a patent or two worth as much as the Google mark, but nothing worth as much as the Apple brand. And the rights are perpetual if you play your cards right. Think about CRAYOLA and COKE. They will make $ forever. But people get sll excited about patents while usually shooting themselves in the foot (feet?) trademark-wise.

Marketing is the key to it all, though, I’m convinced.

[Coronita]

[quote=zk]Biodiesel. Could be.

I said he bought it from restaurants. What I meant was, restaurants paid him to haul it away, and then he sold it. Not sexy, but pretty sweet.[/quote]

He’s lucky. I know people that pay the restaurants to take it away. Because they are reselling it to those making biodiesel.

But I think this goes to show that if you pick something no one else is doing, maybe it’s actually a good business.

[scaredyclassic]

Don’t buy a law practice. Dumb…

[Author]

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