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Monday, April 22, 2024

Do not start a business—Buy one

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Starting a business from scratch is incredibly hard. Many entrepreneurs have to convince friends and family to invest in their business idea because banks will not lend to a startup. The new business may only have one employee, the owner, who is not receiving a paycheck. Then, through sheer grit and discipline, the entrepreneur may be able to hire team members, pay themselves, pay taxes, and hopefully have a little profit left over. This is, if the business survives at all.

Now, imagine walking into a bank to ask for a loan on a business that already generates $100,000 in cash flow. The bank gladly finances the business acquisition because the company generates years of consistent cash flow. The new owner gets to enter business ownership with ten employees, a customer base, all of the equipment they need, a leased space, and enough cash to pay themselves, a manager, their taxes, the debt service, and have $100,000 of profit left at the end of the year.

Which scenario sounds better? Bootstrapping a business from the ground up? Or, entering business ownership with a running start and buying an existing business.

Do not start a business—buy one.

Many do not know that businesses are available for sale. Acquiring a business is simple, but not easy. Here are the basics on how to get started:

What kind of business do you want?

It is best to clearly define the industry, size, and location of your ideal business. The U.S. Small Business Administration prefers to guarantee loans in the industry where the buyer has experience. This is a good place to start.

Restaurants and retail establishments are popular, but they are expensive, hard to run, produce little profit, and tough to get financed. Consider business-to-business industries like manufacturing, commercial trades, and professional services. For example, machine shops, commercial HVAC companies, and staffing firms can produce 10-30% profit, are less dependent on consumer spending, and enter into long-term contracts for high dollar sales. It may feel good to open the latest cupcake shop, but reality hits when you have to sell 5,000 cupcakes just to break even for the month.

When considering the size of the business, the amount of profit you can acquire hinges on how much capital you have to invest in the company.

How much do you have to invest?

To purchase a $1 million business, you will need to bring, at most 20% or $200,000, to the closing table. The math is the same for smaller businesses as well. If you only have $100,000 to loan yourself from an IRA or 401(k), you can still buy a $500,000 company that provides the owner with a $50,000 salary, debt service payments, management compensation, and profit distribution.

If you are still struggling to think of where to get $50,000, consider a home equity loan, or commitments from four friends and family members to give $10,000 (the first $10,000 should come from you). In addition, many banks have programs for minorities, women, veterans, and the disabled to purchase a business for as little as 5% down. If you are buying the business you currently work in, 0% down programs are also available.

Where do you find businesses for sale?

It is not easy to find businesses for sale. It does not do anyone any good if a business’s employees, customers, or vendors know that a business owner is considering a sale. Therefore, you will rarely find a “business for sale” sign in the front window of an available company. Confidentiality is key during the acquisition process.

A call to your CPA or attorney may yield some opportunities. Visit websites like businessesforsale.com and bizbuysell.com. A business broker can also give you immediate access to thirty to one hundred active opportunities. The least popular, but most effective, way to find a business for sale is to tightly narrow the industry you would like to make an acquisition in, and call every company close to your area within that industry. You can uncover the best deals with a short call that starts with, “I’m interested in buying companies like yours… have you considered selling now or within the next year?”

If you have only considered entrepreneurship by starting a business from the ground up, buying a business can seem intimidating. However, if you begin with a strong acquisition plan, are financially prepared, and are good at sourcing deals, you can find a great company to buy that will pay you, pay for itself, and create a legacy for your family.

Jamar Cobb-Dennard is a business broker and mergers and acquisitions attorney. To learn more about how to buy or sell a business, contact Jamar at jamar@jamarcobbdennard.com.

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