Published December 2005

Buying a business? Here are
essential guidelines to follow

Dear BizBest: For the longest time, I’ve been wanting to get into business for myself. But the high risk and sheer energy needed for a startup have held me back. Running a cookie-cutter franchise is totally unappealing, so that leaves buying an existing business. Is that a good option? Where do I start? — Business Shopper

Dear Business Shopper: If your dream of entrepreneurial glory is being derailed by fears of risk, then buying a business may be your solution. Taking over an established business with a good track record lowers the risk considerably. It should come ready-made with trained employees, customers, vendors and financial systems. It also has the benefit of immediate cash flow — something few startups can muster for months or years.

“But beware,” says attorney Fred Steingold, a business law expert and author of “The Complete Guide to Buying a Business” (Nolo, 2005). Finding a business that’s a good fit for you can be an arduous process. And once you do find one you like, the process of negotiating a price and completing the sale is full of potential pitfalls.

Take your time and do your homework. Some businesses are for sale because the current owner is concerned the profit potential just isn’t there, the competition is too stiff, it’s becoming technologically obsolete or a changing marketplace is leaving it behind. Those may be businesses to avoid.

The initial cost of purchasing an existing business is also higher than the cost of starting something new, notes Steingold. And buying a business means acquiring someone else’s concept. “You’ll have plenty of chances to make a good business better, but you won’t have the thrill of creating something on your own.”

You’ll also want to research sale prices of comparable businesses around the country — not always an easy thing to do. One place to look is at BizBuySell.com, which maintains a large database of prices for recently sold businesses.

BizBuySell is a giant online business exchange that lists some 30,000 active, established businesses for sale. Would-be buyers can register at the site and receive e-mail notifications when a business fitting their parameters becomes available. The site also offers a directory of business brokers and is a good place to do some basic research on the business buying process.

Other attractions at BizBuySell include free access to articles on how to find the right business, valuation methods, working with business brokers and help with obtaining financing.

Payment terms will be crucial. According to Steingold, the most likely scenario is that you’ll buy a business on an installment basis. If you do, be sure to consider how you will deal with unexpected expenses and the possible need to borrow money later on.

To start the process, develop a three-pronged search plan that includes:

• Word of mouth. Tell people you are looking.
• Advertising. Place notices in trade publications and on Web sites.
• Direct mail. Send letters of interest to the owners of desirable businesses.

Start your search close to home. “Often, the best prospects are businesses owned by people you already know — shops you patronize or businesses belonging to friends and family,” says Steingold. But you won’t know they are available unless you ask.

You should also know what sellers look for in a buyer. Be prepared to offer details on your career history, financial resources, references and reasons behind your interest in the business.

These resources can help:

• “Buyer’s Workbook” ($29.95) is an online collection of articles, worksheets, valuation rules of thumb and checklists available at BizBuySell.com (click the “Buy a Biz” tab). The “Workbook” includes helpful advice on what to expect when buying a business, points to consider, a Q&A and what to look for in a business for sale. Worksheets will help you calculate if you can afford the business and whether the asking price is reasonable.
• “How to Buy a Good Business at a Great Price” ($70 as a download or $100 on CD) is published by Diomo Corp., a firm that offers business brokerage and buyer advice services. Visit www.diomo.com.
• “The 2005 Business Reference Guide” ($96), published by Business Brokerage Press, offers pricing information and rules of thumb on buying and selling businesses. Visit www.bbpinc.com.

Daniel Kehrer (dan@bizbest.com) is founder of BizBest (www.bizbest.com), which publishes “The 100 Best Resources for Small Business.”

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