Author Topic: Don't Start a Business: Buy An Established One  (Read 1457 times)

TrulyStashin

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Don't Start a Business: Buy An Established One
« on: March 08, 2017, 08:35:26 AM »
I very much enjoyed this podcast from Harvard Business School and I'd love to know thoughts of other entrepreneurs here: 

https://secure-hwcdn.libsyn.com/p/e/d/c/edc57108a5cb43aa/564__Why_You_Should_Buy_a_Business_and_How_to_Do_It.mp3?c_id=14223423&expiration=1488989935&hwt=6a1a63f5e5a75b102b2c7af0f4d02e6c

"Queen of Porta-Pottys" is not a title I had contemplated while growing up.
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SeattleCPA

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Re: Don't Start a Business: Buy An Established One
« Reply #1 on: March 08, 2017, 07:37:08 PM »
Small business multiples are pretty low. I think the average multiple is roughly 2.5 times seller's discretionary cash flow. So on paper (or in an Excel workbook) the deals look pretty good.

Example: A business that makes $100K might cost $250K.

But boy oh boy I think you need to be careful... A lot of people have come through my office looking for help with a financial crisis that's essentially a result of overpaying for a small business they've bought.

CargoBiker

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Re: Don't Start a Business: Buy An Established One
« Reply #2 on: March 09, 2017, 12:59:07 PM »
#1.  Due diligence, due diligence, due diligence, due diligence.

Before you buy, you need to verify everything. You can't take anything the seller says at face value. You should be able to re-recreate their books from scratch and authenticate any data. Also, you need to always have in the back of your mind: "What's the real reason they are selling this business?  They'll tell you a reason, but oftentimes there's another motivating factor.

#2. What value can you add to the business? Could the business see a big jump in revenue, if you applied your marketing prowess? Is there some problem that the business has that you know how to fix?   

For example, a friend of mine bought a local pie company, thinking that the pies could be very successful if sold nationally by mail. The previous owner couldn't figure out how to do this successfully. My friend figured out a process, and grew the business and it ended up being a great purchase for him.


SeattleCPA

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Re: Don't Start a Business: Buy An Established One
« Reply #3 on: March 09, 2017, 01:40:58 PM »
#1.  Due diligence, due diligence, due diligence, due diligence.


Absolutely.

And I would add that you can and should be able to validate many of sellers numbers by looking at sales tax and income tax returns... (Those should tie to the revenue numbers.)

Cpa Cat

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Re: Don't Start a Business: Buy An Established One
« Reply #4 on: March 09, 2017, 02:14:43 PM »
I always tell clients to think about how much it would cost them in time and money to build that exact business from the ground up. Don't overpay for something you can build yourself.

As other have mentioned there are a lot of other questions:
Why are they selling?
How much of the revenue is reliant on the owner's personal relationships with customers?
Do they have debt? What kind of debt is it? Are they making progress paying it? [This is important - I've seen a lot of businesses that seem to be profitable, but have mysterious ongoing revolving debt on credit cards/lines of credit - is cash flow a problem?]
Confirm that their payroll taxes are current - ask for their 941s and proof of payment, or IRS transcripts of the business' payroll account with the IRS.
Who does the books? Are bank reconciliations and credit card recs done?

One of the few businesses that is sometimes an excellent deal is a failing franchise that is crippled by debt. Often the first owner takes on a ton of debt to pay the franchise fee and renovate a building per the standards of the franchise rules. Then the business is not profitable enough to service the debt, so the owner runs out of money. But without the debt, the business would be doing ok or breaking even. The second owner can swoop in and get a fire sale on a franchise without agreeing to service the debt.

The other thing to avoid is hiring on the previous owner for some kind of extended "help me out" contract. The truth is, you usually don't need that person to consult with you for more than a month. Don't get trapped into an agreement to keep them on for a year. Also, if you let the previous owner work from home as a consultant - they aren't working. There is no point to that arrangement.

The truth is, my anecdotal experience is that most buyers don't end up feeling like they got a good deal in retrospect and some end up in serious financial distress from getting sold a load of rotten apples. Rarely do I hear from people that they got super successful from buying someone else's business. The super successful stories are generally from people who start their own.

SeattleCPA

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Re: Don't Start a Business: Buy An Established One
« Reply #5 on: March 10, 2017, 06:16:01 AM »
The truth is, my anecdotal experience is that most buyers don't end up feeling like they got a good deal in retrospect and some end up in serious financial distress from getting sold a load of rotten apples. Rarely do I hear from people that they got super successful from buying someone else's business. The super successful stories are generally from people who start their own.

My observations sync with yours, Cpa Cat...

Also, I agree with you regarding simply bootstrapping some venture yourself. Bootstrapping also has the advantage that you may be able to start small and on the side while still working at a regular job.


CargoBiker

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Re: Don't Start a Business: Buy An Established One
« Reply #6 on: March 10, 2017, 09:45:50 AM »
And I would add that you can and should be able to validate many of sellers numbers by looking at sales tax and income tax returns... (Those should tie to the revenue numbers.)

I wouldn't even trust tax returns.  I'd want to see all sales receipts for the last 2-3 years, and make sure it matches their tax returns, which in turn would match their stated revenues.

bwall

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Re: Don't Start a Business: Buy An Established One
« Reply #7 on: March 11, 2017, 06:18:24 AM »
+1 to all the above advice.

Why would anyone sell any business if it's profitable and 'runs itself!' ? Put the money instead into your Vanguard index fund and have those managers run their businesses and give you a slice.

 

Capyy

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Re: Don't Start a Business: Buy An Established One
« Reply #8 on: March 13, 2017, 07:31:07 PM »
I like to watch "The Profit" I realize it's a TV show. But, I really like the idea of buying into a business and just being smarter than the previous owner, resulting in huge growth. I wonder how much opportunity there is out there for that.

CargoBiker

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Re: Don't Start a Business: Buy An Established One
« Reply #9 on: March 14, 2017, 01:48:33 PM »
But, I really like the idea of buying into a business and just being smarter than the previous owner, resulting in huge growth.

This is when buying a business makes the most sense.


For example, a purchase that would make a lot of sense for me, would be to buy a medium-sized ecommerce site, that isn't selling on Amazon, or only as a small percentage of sales from Amazon.  I know so much about that platform, that I'd have a very good chance of knowing whether or not I could increase the revenues significantly on Amazon, if I bought the business.

calimom

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Re: Don't Start a Business: Buy An Established One
« Reply #10 on: March 16, 2017, 10:25:19 PM »
In 2008 I bought a small service business that had decent MRR (monthly recurring revenue) from the previous owner who FIREd to Hawaii. Since that time, I'm proud to report, it's more than doubled the size and added a number of new MRR accounts. It was a good investment. The original owner did well, captured a fair amount of marketshare in our medium/small town and had a good reputation. Most of the clients are still with the company now in one form or another. I still have the same employee that came with that acquisition and another has been added. There's a web and social media presence that didn't exist before.  The vehicle that came with it has long since been upgraded, and last year I bought a small warehouse for the company location - moving it from my garage. It's been a  pleasure and a challenge to see this business grow.

It depends on the business being sold. You can definitely overpay, but a business that's priced right can benefit buyer and seller, and keep employees and clients. It needs to be a win/win. I'd venture a guess that most business sellers include this potential in their financial planning.

bendavis

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Re: Don't Start a Business: Buy An Established One
« Reply #11 on: March 18, 2017, 04:07:59 AM »
I could not agree more with the podcast. I believe that the cost-benefit of buying a business which is 1 year old (my favourite sweet spot) is way better than start one. IMO, of course ;)

soccerluvof4

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Re: Don't Start a Business: Buy An Established One
« Reply #12 on: March 21, 2017, 07:16:32 AM »
I could not agree more with the podcast. I believe that the cost-benefit of buying a business which is 1 year old (my favourite sweet spot) is way better than start one. IMO, of course ;)





Maybe I just don't have a real good knowledge or know how BUT I have been looking for just this and very hard to come by.
" In life you don't get what you deserve you get what you negotiate"