Sure, you may want to found the next “Facebook” but that’s not the only entrepreneurial path you can walk. In fact, it may not even be the best one. Many aspiring entrepreneurs forget that they can become successful business owners simply by taking over an existing small business. And now couldn’t be a more opportune time to consider that option.
WHY IT’S SUCH A GOOD TIME TO BUY
Real money can be made from the “silver tsunami” of businesses about to be put up for sale by their baby boomer owners. Over the next 20 years, retiring business owners will sell or bequeath $10 trillion worth of assets, held in more than 12 million privately owned businesses, according to the California Association of Business Brokers. More than 70% of those businesses will likely change hands, offering major opportunities for younger entrepreneurs.
If you’re buying a company because you want to be your own boss but don’t plan on making any changes once you take over, keep your day job.
That turnover is already under way, and it’s fueling a booming business-for-sale market. Small business transactions are up 25% from 2017 and have reached the highest levels since the second quarter of 2008, just before the start of the Great Recession, according to an October 2017 report from the online business marketplace Biz4Less. But the longer you wait, the more you’ll pay. Median asking prices are also on the rise, from $290,000 in the third quarter of 2016 to $318,000 today. Biz4Less finds that restaurants, retail, internet services, manufacturing, and bars are the top sectors for business buyers right now.
While buying a decades-old widget factory or neighborhood bar may not be as sexy as building the next software empire, existing businesses can be real moneymakers, giving new owners a chance to move in on a proven concept and an already established client base as they make it their own.
If you’re contemplating a move to business ownership and are thinking about buying an existing business, here are a few things you need to know.
EIGHT TIPS BEFORE YOU TAKE OVER
1. Research, research, research. What kind of business do you want to own? If you run a company already, does it overlap with the type of business you’re considering taking over? How might your professional experience give you an edge? Before you can make a decision, delve into your prospective industry to learn as much as you can. Attend trade shows, talk to the types of people who will be your future customers, and research your competitors–not just about what they’ve already got on the market, but where they may be headed next.
2. Connect with people who can be good matchmakers. Once you’ve selected the kind of business you want to own, you’ll need to find owners who are ready to sell. While online business marketplaces and in-person auctions are a good place to start, often the best leads come from contacts in your industry, business brokers, or advisers. Don’t forget to include lawyers and accountants in that group, especially those that work primarily in the industry you’re pursuing.
3. Open the books and do your due diligence. Before you sign that check, you need to know what you’re spending your money on. Thoroughly review all business records to look for pending litigation, tax audits, or insurance disputes. Follow the paper trail as far as it goes. You should also search for any existing liens. If the company you want to buy is an LLC or corporation, review the Certificate of Good Standing as well as the bylaws or operating agreement, and ask your trusted advisers to confirm that the business is fully vetted before you make the leap. This can be a tough challenge, but you don’t have to do it alone.
4. Get to know your potential customers and competitors. You wouldn’t want to buy a grocery store, for instance, in a town with 100 other grocery stores. That’s an obvious example, but understanding how competitive (or oversaturated) your market might be isn’t always easy. So take a hard look before you actually step into it, and examine the customers who are already there. Why do they support the business on a regular basis? Do they like its products or services? Or are they longtime friends with the original owners? If so, will they stay on after their friends retire? What is it that makes this business worth your money?
5. Be ready to add value–even to a successful business. If you’re buying a company because you want to be your own boss but don’t plan on making any changes once you take over, keep your day job. If you’re merely keeping the lights on, then you still have a boss: the bank. Before you buy, figure out what you can do to move a business in a new direction or enter new markets, for example. That’s the only way you’ll see any real returns from your efforts.
Individual buyers may have an edge; many retirees want to sell to someone with similar values, hopes, and dreams.
6. Figure out how to appeal to the owner. While private equity firms have been scooping up more small businesses in recent years, prospective individual buyers may have an edge; many retirees want to sell to someone with similar values, hopes, and dreams. If the original owner has poured 30 years of her life into the business, let her know that her baby will be your business for the next 30.
7. Closing is a process–be patient. Buying a business is like closing on a house: There are still steps you have to take after the papers are signed in order to fully complete the deal. You may need a new federal employer identification number, for example, new tax numbers, new or transferred business licenses, and a new registered agent. Make sure you’re prepared to tackle all of this.
8. Draw up a 100-day plan. Plan how you’ll execute the first 100 days of your ownership, and be ready to move quickly on your plans. Always remember: If you’re not looking for new ways to grow, your competitors are. So the first few months in business really count.
Contrary to what many believe, there are actually two main paths toward becoming a business owner: Start your own or buy an existing one. Both take long hours and hard work. But taking over an existing company from a retiring entrepreneur means you don’t have to start from scratch–and it may pay off better than bootstrapping a startup.