Buy a Business
By Steve Gillman - 2011
I hope nobody reads this page and then runs out to buy a business.
There is a lot more to know than what will be presented here.
Consider this a very brief overview of what it means to buy a
small business, and why it may make more sense than trying to
start one.
Let's address that last question first. You may be aware that
most businesses fail within a few years. It is especially risky
to start a non-franchise restaurant, but starting any business
is a gamble. Even if you succeed it can take a few years to get
past break-even and then to finally make a living. This is not
an argument against trying, but it points out why buying an existing
small business can be a smart move: You are buying an instant
stream of income.
I just checked out Denver, Colorado on a website that lists
businesses for sale. Here are some examples of what I saw:
Flower shop; Price: $39,000; Cash flow: $25,000
Home Medical Equipment Sales; Price: $42,000 Cash flow: $34,000
Hair Salon; Price: $80,000 Cash flow: $56,000
Bread Route; Price: $115,000 Cash flow: $62,000
Coin Laundry; Price: $135,000 Cash flow: $30,000
Liquor Store; Price: $130,000 Cash flow: $54,000
Those were a few of the businesses for sale at the low end
in terms of price and cash flow. Others were selling for hundreds
of thousands of dollars, and a few were in the millions.
You might see a business that appeals to you on this short
list. I like that hair salon because of the cash flow in relation
to the price, for example. Now, if I even knew how to cut hair,
it could take a few years to build a business up to that level--if
I succeeded. But if I have $80,000 to buy the salon I can immediately
have an income of $56,000 annually. Even you had to finance much
of the sale and so had $10,000 in loan payments, you would have
$46,000 in income, and more once the loan was paid. You can see
the appeal of buying versus trying to build a business.
As for myself, since I do not cut hair and don't want to be
at a salon all day, my goal would be to find a manager for the
business, perhaps one of the current employees. If I was able
to keep the additional labor cost to $30,000 or so, I would still
be making $26,000 on an investment of just $80,000--not a bad
return!
Keep in mind that if the income a business provides is too
low, and the current owner is supplying some or all of the labor,
you are essentially just buying a job. It might be a job you
like and it might pay enough, but it's still a job. If you want
to make more money your goal is to either buy a business that
you can afford to staff, or one that you plan to grow to that
level.
The liquor store in the example above is open 84 hours weekly
and there are no employees. A couple could manage that (a husband
and wife do now), but that's a lot of hours for the pay. It would
take at least $40,000 annually to hire enough help to cover those
hours if you wanted a more hands-off approach, which would bring
the annual cash flow down to $16,000. I would want to see a lot
of potential for growth to be interested in that one.
Don't think you need to have a lot of money to buy a business.
It definitely helps, but it is possible to finance up to 80%
of the purchase price with a bank loan guaranteed by the SBA
(Small Business Administration). It is also very common for sellers
to offer some financing. And i you keep your eyes open and are
ready to act, there are sometimes inexpensive opportunities to
be found. I know a couple who had a shipping business essentially
given to them (the owner wanted to do other things and just required
them to take over the lease).
Of course, you will want to do a lot of studying before you
go out and buy a business. Read a couple books on the subject,
talk to business owners, look at what is selling and for how
much, and prepare your finances. You will also need to have a
lawyer review any contract you sign, and an accountant to help
you decipher the books before you buy.
How Much Can You Make?
This obviously depends on what kind of business you buy.
Ways to Make More | Related Opportunities
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Businesses are largely valued according to the cash flow they
produce, so if you can buy cheap and build the profitability,
you can sell for a big gain--and then repeat the process. Buying
and selling businesses can be very lucrative.
Qualifications / Requirements
You need to get educated and have some money to invest.
First Steps
Read a few books and articles. Look at what's for sale in
your area. Prepare a checklist of what you want in a business,
and another for all the questions you need to ask of sellers.
Contact a business broker for help finding the right business.
Resources
The Complete Guide to Buying a Business, by Fred Steingold
- This book has had good reviews.
SCORE - This
is a nonprofit association that offers free help to entrepreneurs
and small businesses.
BizBuySell
- A great place to start if you want to buy a business or get
educated about prices and what's out there.
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