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oceangerl
12-07-2009, 06:55 PM
I've been doing my research about the possibility of purchasing an existing business since I never ever owned a piece of business before. I'd like to know if anyone in here has any experience buying an existing business from another business owner, either as a franchise or non-franchise? I have a couple of questions.


Is it good way to get your feet wet rather than start from scratch?
A good move with today's economy?
What kind of pitfalls or warnings to be heeded once you purchase the business?
Do you need to have additional working capital in addition to buying the business itself?
Do I need to have a business plan in order to run and manage this existing business?
Will I have the ability to change the business name to a new one once I buy it from the owner to fit my goals and vision or is that not a good move if people are used to coming to this business for years under old management/owner?


Is it more advantageous for me to go on this path rather than trying to develop a new business if I don't have that kind of experience to begin with yet am willing to try something new and learn from it nor the capital needed to start up a new brick and mortar business? Also, is it easier to do this because there is competition from local businesses as well? Appreciate for any of your thoughts or experience on this.

Business Attorney
12-07-2009, 10:49 PM
I've been doing my research about the possibility of purchasing an existing business since I never ever owned a piece of business before. I'd like to know if anyone in here has any experience buying an existing business from another business owner, either as a franchise or non-franchise? I have a couple of questions.


Is it good way to get your feet wet rather than start from scratch?
A good move with today's economy?
What kind of pitfalls or warnings to be heeded once you purchase the business?
Do you need to have additional working capital in addition to buying the business itself?
Do I need to have a business plan in order to run and manage this existing business?
Will I have the ability to change the business name to a new one once I buy it from the owner to fit my goals and vision or is that not a good move if people are used to coming to this business for years under old management/owner?


Is it more advantageous for me to go on this path rather than trying to develop a new business if I don't have that kind of experience to begin with yet am willing to try something new and learn from it nor the capital needed to start up a new brick and mortar business? Also, is it easier to do this because there is competition from local businesses as well? Appreciate for any of your thoughts or experience on this.

I have represented buyers and sellers of businesses for thirty years. There is no single right answer to any of your questions. I have seen buyers who bought a business for a good price, developed it further, and did extremely well with it.

I have also seen buyers who overpaid for the business, failed to understand the risks and threats facing the business, operated the business poorly or simply had bad timing or bad luck.

That said, here is my stab at answering your questions:


Is it good way to get your feet wet rather than start from scratch?
Buying a going business is often a great way to get started. Typically you have a ready-made revenue stream and all the major pieces are in place. You need to be careful, though, that you don't pay too much and that you understand the business BEFORE you buy it.


A good move with today's economy?
In today's volatile economy, there are more unknowns so perhaps it is a bit more risky than at other times. On the other hand, because of those risks and the fact that financing is much harder to obtain, the prices that businesses are selling at in terms of multiples of EBITDA (earnings before interest, taxes, depreciation and amortization) are very low. In that respect, there has rarely been a better time to buy if you have the ability to finance both the current and intermediate term capital needs of the business.


What kind of pitfalls or warnings to be heeded once you purchase the business?
Once you purchase the business, the pitfalls and warnings are basically the same things you should be looking out for if you had built the business from scratch. BEFORE you purchase the business, there are many things you should look out for. You should make a careful investigation of the business (called "due diligence") with an experienced team of advisors, including an accountant and attorney, and others that will depend on the type of business you are buying.


Do you need to have additional working capital in addition to buying the business itself?
Yes. Even a successful business needs working capital. In fact a growing business often needs more working capital that a shrinking business because it needs to increase the amount of its inventory and accounts receivable, among other things.


Do I need to have a business plan in order to run and manage this existing business?
Personally, I think anyone who buys a business (or starts one, for that matter) needs a business plan. If you are going to get any institutional financing for your purchase, the bank will almost certainly insist on seeing a business plan unless you have so much other collateral that the bank is really not making its loan based on its expectations for the business.


Will I have the ability to change the business name to a new one once I buy it from the owner to fit my goals and vision or is that not a good move if people are used to coming to this business for years under old management/owner?

Yes and yes. Yes, you will have the ability to change the name. Yes, it is often not a good idea because part of what you are typically buying is the goodwill of the existing business, which is usually tied to its name. Of course, there are exceptions.

Steve B
12-08-2009, 06:48 AM
What he said.

Also - when looking at how much to pay for the business. A lot of the time the current owner is going to base his asking price on results from the last several years. This is a very logical way to do it - but, given that the economy was very different 3, 4, and 5 years ago - the data from those years needs to be considered with the proper context. This is where your team of advisors will help you. Anticipating future income is a bit trickier now.

rezzy
12-08-2009, 02:33 PM
I dont want to take over the thread, but how does one find a business which is for sale?

vangogh
12-08-2009, 03:39 PM
David really covered all the specifics very well above. I'll add a general thought or two.

All business carries risk, whether it's a brand new business or an existing business. There's more to starting a new business though than running an existing business, especially an existing business that has a history of making money. Most new businesses never reach that stage.

When you buy an existing business what you're ultimately paying for is all the work that goes into taking a business from new to being profitable. You have to consider how much work that would be and how much money that's worth.

With some businesses or industries it might make more sense to start from scratch. The effort to become profitable may not be worth the expense of buying the existing business. With some businesses it can make a lot of sense to buy an existing brand, even if you end up redoing most everything in the business. There's no easy answer.

One other point to consider is how much you can learn by starting a new business. Some of the experience and knowledge you gain in starting from scratch can be invaluable later.

If you're unsure how to determine what this business is worth, you may want to consult with an attorney or accountant. Either should be able to help you determine what the business is worth and how much you should reasonably pay for it.

@Bryan - I don't know in general, but if you're looking specifically for a web based business a lot are sold on forums like digitalpoint and sitepoint. Also searching 'where to buy an online business' or similar does bring up a lot of results. I'm not sure which place is best, but they are listed.

Steve B
12-08-2009, 03:39 PM
Google - "Business Broker".

Harold Mansfield
12-08-2009, 03:52 PM
The only thing I can add from the perspective of working for people who have purchased businesses is to make sure you know the business that you are purchasing.

I have worked for many people who have purchased bars and nightclubs that should have done well, yet the only experience they had in the business amounted to sitting in a bar. They were under the illusion that just because they had run other businesses before , that they could run any business and nothing is further from the truth.

Each business has it's own particulars that require experience in that particular field. Just because you have run a successful retail shop, doesn't give you the know how to run a bar...and so on.

Of the otherwise successful business people that I have worked for who dived into the bar business, not matter if they invested 300k, or 3 million...the ones without any experience in the business...failed.
The ones that made it..or I should say the one that made it..hired a competent manager and let them run the place.

The best advice I can give is to make sure that no matter what kind of business you purchase..make sure you know how to work that business.

Business Attorney
12-08-2009, 07:13 PM
I dont want to take over the thread, but how does one find a business which is for sale?

It really depends on the type of business, the size of business, the location, etc...

While business brokers are one avenue, some types of businesses are rarely listed with a business broker. As vangogh pointed out, web-based businesses are often sold through discussion forums, or through sites like flippa.com. In many areas of the U.S., restaurants and bars are usually listed and sold by real estate brokers, even where the assets of the bar or restaurant don't include the building. Many times, the business is not listed "for sale" at all, but the buyer approaches the seller because of the potential that the buyer sees in the business.

Evan
12-08-2009, 08:21 PM
Will I have the ability to change the business name to a new one once I buy it from the owner to fit my goals and vision or is that not a good move if people are used to coming to this business for years under old management/owner?

I'd recommend incorporating or forming an LLC, and buying just the assets of this business.

Let's say the company I wanted to buy was a corporation. If Joe sold me his 100 shares of common stock, I get all of the same benefits of the history of the company. But you also get all the bad. Say somebody was trying to sue the company for something that happened two years ago. If you kept the same legal entity, you would be liable. If you were a seperate entity, you would not. There are also a lot of potential unknown liabilities in the current business, and you really ought to not take those on. (Do you know whether he's paid his taxes in past years? What if those years were audited, and you have no access to those records?)

Plus, even when buying a business -- they're not just going to change over the checking account to you and give you their accounting file. You're going to have to go through some of the preliminary steps of opening a business, such as opening a checking account and creating an accounting (e.g. QuickBooks) file.

handprop
12-08-2009, 10:54 PM
Most things of this nature need to have a value attached to it and that's the tough part, so do your homework well.

Some of the best businesses are not found with brokers but in a network of other business owners. This of course depends on the size of the business and the nature of what they provide. I come from a family of business owners and have gotten to know many of the investment groups that buy businesses and all of them have been bought through word of mouth, which is nothing more than relationships. The brokers (attorneys) are found after the fact.

Mike

huggytree
12-09-2009, 01:27 PM
i know a few guys who bought a plumbing company...they didnt have to go through the 6-9 month extremely slow period i did when starting...they had a few thousand steady customers from the start.....

my opinion is there is usually a reason people sell things...95% of the time its because its broken or needs repair....ive gotten a few cars used which were good, but ive gotten a few which needed a couple thousand to repair...my houses were ok.....but id be wary about a business not needing repair....make sure sales are strong..

i would have enough backup to live on for a year.....i always believe in having tens of thousands laying around...

i dont think any business that people dont 'need' is a good idea right now...gas stations, food stores, drug stores..we all need them....i wouldnt buy into anything that isnt a 'need'....unless its dirt cheap and your willing to lose money for a couple of years.

if your going to change the name then id say why are you buying it?....the name and the phone # is what your buying.....lose the name and most the value is gone...i wouldnt change the name.

you need a business plan...you need a strategic plan for where your going..

Business Attorney
12-09-2009, 02:37 PM
my opinion is there is usually a reason people sell things...95% of the time its because its broken or needs repair...

There are many reasons that people sell businesses, and it is important to try to figure out why a person is selling his business.

Sometimes it is because the business is "broken or needs repair" but in my experience that is only a small percentage of cases, certainly nowhere near 95%. In some cases it may be because the business needs a level of investment to grow to the next stage that the current owner either can't provide or isn't willing to risk. In many cases, the owner of the business simply wants to retire and doesn't see continuing ownership of the business as consistent with his retirement needs and desires. There may be a divorce, death or other outside event. There may be other opportunities competing for the owner's attention and capital. The list goes on.

Knowing why the current owner is selling will tell you a lot about what you should pay for the business and what threats and opportunities you should expect after the purchase.

phanio
12-09-2009, 03:57 PM
The only thing I can add from the perspective of working for people who have purchased businesses is to make sure you know the business that you are purchasing.

Could not agree more.

Just also make sure you know the other owner is selling - the real reason. Talk to people in the community, their business neighbors and others in the industry. You don't want to inherit something with a bad name to it - or, you will have to start over.

One great way to find this out is to see if the current buisness owner will either carry the note on the business (even if that is not your plan) or agree to stay on for 12 months or more (even if you don't want them there that long). If they agree, then they have confidence in the business. You don't actually have to do those things - but, just see if they are willing.

All businesses depend on the owner. What you want, where you want to start and the amount of time and effort you want to put into it. Does not matter if it is already established or from scratch. If you buy right or start right - then going forward should all be th same.

Lastly, don't over pay - goodwill is not what it is made out to be.

huggytree
12-09-2009, 06:08 PM
id only pay 1/2 of what it was worth 5 years ago...no ones doing well at all that i talk to

yoyoyoyoyo
12-11-2009, 07:26 PM
id only pay 1/2 of what it was worth 5 years ago...no ones doing well at all that i talk to

I hate to echo this sentiment, but...

no kidding.

billbenson
12-11-2009, 08:00 PM
So, what type of business? What are your skills? Do you have free time to start one on the side instead?

If you don't have any real experience running a business, I'd say you should start a business on the side first and run it. Just for the learning experience. Any kind of business you can do from home. Treat it like a real business not a hobby, do a business plan, marketing plan, stick to it until you are comfortable running and growing the business. Ideally that becomes your business, but that depends on the type of business you want to buy.

Spider
12-12-2009, 11:00 AM
Knowing why the owner is selling is useful, as is all information about the business. Find out as much as you can. In the end, though, it's not the value the seller places on the businees that counts, it's the value you place on it - what is this business worth to you?

I have found that sellers often consider things like the value of future business, but that is not theirs to sell. You still have to get that business yourself. The only future business that counts is the value of any ongoing contracts.

The reason the seller is selling is really quite immaterial to the buyer. The facts will interest you, and you should find out what they are, but the facts can easily mean different things to the seller than they will mean to the buyer. For example, a major customer may have gone out of business, but if the buyer already has a strong customer list that will matter less to the buyer than it does to the seller.

Here's basically how I would value a business -

-- Add back the personal income the seller has been taking from the business and deduct the income I will withdraw.

-- Allow for a reduction in business income for business lost due to loyalty to the seller, or any other reason.

-- Add a value for the customer list that you believe will remain loyal to the business. What would it cost in time and money to recreate a customer list if that one was to disappear?

-- Add to anticipated expenses interest on money I inject, whether it is from my personal savings or borrowed.

-- Find out the actual cost of replacing all the equipment with equipment of similar age and condition. Then add the net replacement cost of equipment that needs to be replaced. Add the cost of repairs to equipment that needs repairing.

With this information to hand, you can begin negotiations. I am always mindful of the old saw that says: Offer $2,000 for every $10,000 of asking price. Why? Because if the seller is asking 10,000, that means he would like to get 8,000, which means it's worth 6,000, so offer him 2,000 and settle at 4,000!

Have fun!

CBoykin
12-12-2009, 11:29 AM
If you're unsure how to determine what this business is worth, you may want to consult with an attorney or accountant. Either should be able to help you determine what the business is worth and how much you should reasonably pay for it.



An independent "VALUATION" is what would best determine the value of the business. Real Valuations are not offered by your local attorney or accountant. I am not suggesting that these people would not be helpful, the probably should be consulted with, but would be better done with a real valuation in hand. Depending on the type/size of business the valuation could run between $5,000 and $30,000 or more. The selling business may have already had a valuation, may have been biased or not, but you should ask for a copy if they did. Valuations can serve many purposes so it is important to know why it was done to begin with. Valuations can take several months to complete. They can be "Certified" or not.

Addtionally, and before a valuation is performed, should you decide to get one, much information can come from an analysis. The purpose of an analysis is not to determine the value of the business, but rather determine the performance of the business, the plan, and identify the strenghts/weaknesses that exist. My firm charges $2,000 - $5,000 for this service and it takes 2 weeks to complete.

Below is a link to a site with more info on valuations, and if you would like a link to my site PM me.

Business Valuation (http://www.score.org/article_business_valuation_101.html)

CBoykin
12-12-2009, 11:54 AM
it good way to get your feet wet rather than start from scratch?

could be your best move or your worst. If you assume control of a business that is out of control, and you are not experienced in "turn-arounds" you could be in big trouble. On the other hand, if the business is already operating in a "turn-key" manner with systems in place to control the operations, and has a good track record of performance, then the actual ownership becomes less relevant for it's success/profitability.


A good move with today's economy?

the current econimic climate creates many great opportunities, just find one that will take advatage of it.



What kind of pitfalls or warnings to be heeded once you purchase the business?

This is where you need to do your research before making the purchase rather than being surprised after the fact


Do you need to have additional working capital in addition to buying the business itself?

any good CPA can steer you in the right direction in terms of how much capital you should have ready to put into the business. Most businesses require the use of a Line of Credit, or other sources of funds to maintain solvency on the balance sheet. Unless your make changes to the operation there should be a track record in previous balance sheets that will answer your question


Do I need to have a business plan in order to run and manage this existing business?

Every business running has a plan, if the owner knows it or not. Not only will you need one, it needs to be tailored to your Primary Aim and Strategic Objective. The alternitive is usually a "Seat-of-your-Pants" business plan that does not exist on paper and will no doubt lead to significant profit leakage!



Will I have the ability to change the business name to a new one once I buy it from the owner to fit my goals and vision or is that not a good move if people are used to coming to this business for years under old management/owner?


This would depend on how much of the value of the business is in the name. Are you buying a name, just buying out someones inventory, or buying a turn-key operation that meets your goals/vision,


Is it more advantageous for me to go on this path rather than trying to develop a new business if I don't have that kind of experience to begin with yet am willing to try something new and learn from it nor the capital needed to start up a new brick and mortar business? Also, is it easier to do this because there is competition from local businesses as well? Appreciate for any of your thoughts or experience on this.

only you can answer these questions... you need to start with really understanding what it is that you want and why you think owning your own business will get it...

Best of luck!

vangogh
12-12-2009, 01:50 PM
An independent "VALUATION" is what would best determine the value of the business.

Makes sense. Hadn't even occurred to me. I was thinking a lawyer or account could help serve as a general point of information.

The Entrepreneurs Network
12-13-2009, 09:50 AM
There are several advantage in buying an existing business, but there are a lot of risks. People sell a business for a number of reasons and often it is because they cannot make any money at it. You need to be very careful that you do not buy a business with a lot of skeletons in the closet.

<please set up a signature>

jfrutkin
01-13-2010, 10:21 PM
Hello,

My recommendation would be to start from scratch. Most of the people selling businesses today are doing so because their business is either making little money or the business is very time consuming to manage. Given the low barriers to entry, why not start a business from scratch?

Best of luck to you.

UFOnaut
12-25-2010, 12:14 PM
First of all you need to know well this field of activity, because I seen many people who bought existing profitable business, but didn't know nothing about that field and after some time that business was broken.

rockhound
03-29-2011, 08:12 PM
Hello,
New to the site and was wondering...if you buy an existing business with the name (which happens to be the surname of the former owner) do I need to register it as a fictitious biz name?
Thank you!

Business Attorney
03-29-2011, 08:19 PM
In every state I have looked at, the basic rule is that if you are not conducting the business in YOUR name, then you should register the name as an assumed/fictitious name.

incuba
05-19-2016, 07:29 AM
Starting a business from scratch requires thorough planning, careful analysis and a good amount of research, because of which buying an existing business becomes a more feasible option as you can bypass a lot of struggles and hassles. Buying a franchise is an even more safe option, as you are going to be investing in a tried and a tested business system plus you will not be required to setup the management policies as they are well described and pre-planned for you to replicate. The risk factor of being able to run the business is always there, whether you start a business or you buy an existing one, although you are going to be cutting down on the risk if you opt for the latter option.

In response to your questions, buying an existing business is indeed a good move with todayís economy where establishing a new business can make you turn head over heels due to the various complications it comes with. Even though it is a safe choice, you need to be aware of the risks associated with it. You have to conduct a careful review about the business before deciding to purchase it to avoid getting your hands onto something which might not work for you. Yes, you will be needing additional capital other than the purchasing price considering the fact that you might need to market your business in order to attract new customers and enhance the image of the business. Although you might not need to invest further in the business as the operational costs are most likely to be generated by the business itself along with a profit margin too which is one of the biggest advantages of buying an existing business. You do not necessarily need a business plan to manage or run the business as the company is already functional with a staff who know exactly what needs to be done. You can follow the same old procedures which were being followed by the previous owner unless you like to introduce something innovative to the company. Buying a business gives you the complete ownership of the company and you can definitely change its name too, but doing so might have adverse effects on the reputation of the company as it will already be having a status of its own in the market. Or, if you think that you can improve the productivity of the business by coming up with a new brand identity, then you are free to take up the challenge but make sure that you donít lose hope midway, stay confident and determined.

Considering the facts stated above, I would say that the option of buying an existing business can prove to be highly beneficial for anyone who does not have experience in the field and does not know how to go about starting a new venture. Itís a good initiative to get into the corporate world and learn a lot about conducting business, besides that, yes, business is not a cake-walk and you will have to face the challenges posed by your competitors but thatís the fun part if you take it sportingly.

AmeliaQ
05-27-2016, 09:24 PM
Hi Oceangerl,

Business ownership is a good move in any economy, but what I am curious about it what type of business? What type of service are you going to provide?

You will need additional working capital in addition to buying the business if you need to make improvements, purchase inventory and advertising, etc.

A business plan is a must. It will not only aid in getting a working capital loan (line of credit) with the bank but will also help you by giving a guideline of where you want your business to go and what it is that your business is providing.

You will have ability to change business name to a new one, when you incorporate it or apply for a tax id. If this is a physical place that people are used to coming to for many many years, you will probably want to leave the name as is, for at least a while.

Best of Luck!