Consider Whether to Start a Business or Buy an Existing One
First, there is another big choices you need to make: whether to buy an existing business or starting one on your own.
Buying An Existing Business
On the buy an existing business side of the ledger, advantages include you’ll have an existing cash flow. Buying an existing business means there’s already a steady stream of money coming in. It’s one less thing to worry about.
You’ll get a bigger market share and more existing customers with the business that’s already set up. Chances are it’s been running for several years and is well established.
You also get a proven business model. Many franchises are good for these reasons. Buy an existing franchise and you get established methods for running things.
Starting a New Business
There’s more uncertainty with a start up. You’ll need to put together all the materials and equipment required. You won’t have any customers at first. And you’ll need to assemble a staff and train them.
You need to decide on a company structure. Picking between sole proprietorships, partnerships and forming a corporation determines everything else you’ll do.
How to Buy a Business
Look at The Financials
House started by stressing it’s a process.
“Buying a business can be more complicated than buying real estate,” he says. “There’s a lot of due diligence. You really need to understand things like the financial end of the business.”
The matter gets complicated when you’re looking at businesses for sale. That’s because owner operators try to decrease taxes while bumping up the sale price at the same time. That can muddle the real meanings of the financial statements you need to look at.
“As a buyer you need to understand the real earning potential. Buyers like clean financials.”
That means having an auditor crunch the numbers.
Put Together A Good Team
House says getting the right experts on your business team is essential. They can help you understand if the business is a good buy.
“You’d be wise to at least consult with professionals. You need to make sure you’re going in with your eyes wide open to what you’re purchasing.”
An attorney is a must-have. They should review all of the documents to make sure everything is done legally. Make sure you find one that has experience with SMBs.
An accountant needs to look at the books for the reasons mentioned above. They should also be able to give you an idea of the businesses’ value and it’s earning potential.
A business broker makes up the third team member. Most of them specialize in specific industries. They supply some excellent advice on what you should be looking for.
Consider Your Lifestyle
You need to think about how a business and your lifestyle will work together. Think about whether you’re just looking for a side hustle or something that takes up a bigger chunk of your time.
“You need to ask yourself if you’re going to be an active owner/operator or if you plan on doing it in the evenings after your other job.”
The distinction is important for more than just dividing your time up. If your new business is a profitable side hustle, you’ll need to hire a manager to run it properly.
That brings up another consideration.
“Obviously, that’s going to cost more. Some small businesses have enough money to pay for one owner but not always a manager.”
Put Together A Financing Structure
Paying for that new business means putting a finance structure in place. That can include what’s called seller financing.
“It’s not uncommon for the exiting owner to finance a percentage of the purchase price,” House says. “Buyers like these. They show the seller is standing behind the earning potential of the business.”
Typically, a new buyer needs to come up with a down payment to start the ball rolling. Online lending is big for financing a business purchase.
Here’s another option.
“We work with a company that does the rollover 401K financing. Basically, you can take your 401k and take it to buy share in your own company,” House says.