For the St. Louis American
According to the Office of Advocacy, in 2005 there were an estimated 25.8 million business in the United States. Obviously, many people just like you desire the freedom, flexibility and unlimited income one can potentially make while owning a business.
A large percentage of those people believe that starting the business from scratch is the best way to satisfy those desires. The following information highlights the benefits of buying a business instead of starting one.
Fact: 66 percent of businesses survive two years after start-up, according to the Small Business Administration. That number decreases to 44 percent after four years and 39 percent after six years.
Reasons for the decline in such a short timeframe include: lack of a well developed business plan or model, lack of business experience, poor sales and expense assumptions, poor cash flow management skills, poor pricing mix, poor marketing plan and execution, no customer diversification, poor delegation skills, lack of employee training and hiring the wrong people.
Fortunately, many of these reasons dissipate when taking ownership of an established business. Think of it like this: When you buy an established business, you are buying from the small percentage of businesses that survived. More specifically:
* Internal processes, systems and marketing strategies are already in place and have been tested.
* You already have a customer base bringing in revenues.
* A history of sales and expense trends will decrease the need for blind financial assumptions and help you manage cash flow and pricing hire and train new employees.
* The legwork of finding the most reliable and cost effective suppliers has been completed.
* Many business sellers agree to train the business buyer for an extended period of time ranging from one month to a year. It’s like having a consultant, executive board and mentor, all rolled into one.
To keep from being burned when buying a business, it is a good idea to use the help of a professional. Business brokers specialize in buying and selling businesses. They walk buyers through the process of finding the right business for the buyers, facilitating the buyer/seller meetings and due diligence activities, finding financing options, and managing the legal and financial documentation through the close.
When buying a business, a rule-of-thumb to remember is that the cash flow or seller discretionary income (amount of money the owner pockets each year) must be able to: pay the business off in 3-5 years, provide a decent salary for the owner and service all of the business’ debt.
Also, knowing the following information will help you decide whether or not the business is worth buying:
* Average sales for the last three years – look for an upward trend.
* Seller’s reason for selling the business – if the seller has a “pain” he/she is trying to eliminate, then the seller is motivated to sell and probably more willing to negotiate price and terms.
* Future growth opportunities – gives the buyer a head start on ways to grow the business
* Steadiness of sales (cyclical or seasonal).
* Percentage of sales from repeat customers – gives you an idea on how the customers view the quality of the business’s products and services.
* Percentage of sales from long-term contracts – the higher the percentage, the more steady the income.
* Customer list – look for a diverse customer base.
* Seller’s discretionary income – this is the single most important number to determine if you will be able to make a living from the business.
* Seller’s willingness to finance part of the asking price (if necessary) – seller financing is great when the buyer cannot qualify for a bank loan; however it gives the seller leverage.
* Seller’s willingness to train the new owner.
If you are considering starting a business, look into buying your business instead. With the information provided above and the help of a trained professional, you could be on your way to realizing your American dream.
Otis D. Jones is a management consultant specializing in organizational development, human resources and project management. He can be reached at joneso@hiseconsulting.com or www.hiseconsulting.com.