Why consider buying a business?
The majority of people associate owning a business with starting it from scratch. However, starting from scratch presents a set of unique and abstract challenges. With these challenges come elevated risk. Most notably: building a brand, establishing relationships with various stakeholders, forming an effective team, and, above all else, generating cash flow.
More often than not, buying a business over starting from scratch eliminates most of the above risks - or at least diminishes them. When you buy an established business, you take over the ship while it’s moving. Meaning, the company is revenue positive on day one. Albeit in this day and age, taking the start-up route is perceived in society as the more seductive path, as plenty of lucrative opportunities exist in the acquisition arena.
Entrepreneurship through acquisition is a term used to describe the process of buying a business and filling a leadership role. Running your own company is very different from climbing the corporate ladder within a company. It allows you, the entrepreneur, to determine your desired lifestyle and career path.
Some of the many benefits of this include (but are not limited to):
- You decide the value of your time.
- Your compensation is based on your company's performance, not your manager's perception.
- You can surround yourself with people you want to work with.
- You decide the hours you want to put into your business.
So What Does Buying a Business Look Like?
While there are several strategies to consider when deciding to purchase a business, there are a few common routes to look at. The majority of prospective business buyers start with an online search. Some people already have an idea of a type of business, a particular industry, or its location, and others don’t. However, once you have sourced a business you think you might want to buy, the next steps are fairly consistent.
Some of the high-level steps in the business-buying process are as follows:
- Source a business that fits your criteria.
- Begin initial conversations with the seller.
- Use the given financial information and overall company background to further judge whether their business is the one for you.
- Discuss the terms and expectations surrounding the deal with the seller.
- Sign a non-binding Letter of Intent (LOI).
- Perform a final round of due diligence. It is advised you seek outside resources to help you (accountant, lawyer, advisor, etc...)
- Organize and finalize your funding. It is worth looking into SBA loans for this- the Small Business Administration (SBA) offers government-backed loans aimed at supporting small business buyers (SBA loans can cover up to 80% of the purchase price).
- Some deals also include the seller's note. The exact terms should be discussed with the seller but it generally results in 10-15% of the business purchase price.
- Gather the raining funds. Whatever cannot be produced by an SBA loan or seller financing will need to be cash. Pool together capital from a group of investors or from your own savings to fill the remaining purchase price.
- Finalize and sign the Sales Agreement Document.
- Close the deal.
Although the process may seem intimidating at first glance, there are a plethora of resources - both human and technological - that you can use to leverage your search and capital-raising efforts.
In the coming few years, due mainly to the retirement of baby boomers, millions of quality businesses will be listed for sale and ultimately change hands. The opportunities to both control your career advancement and to create unbounded amounts of wealth for yourself are on the horizon. Exploring your options and entrepreneurship through acquisition is certainly an option worth considering.