Why the Best Businesses for Sale Aren’t for Sale
The freedom that comes with being an entrepreneur who owns his own business is exhilarating.
No boss giving you orders left, right and center. You get to work on something that you actually care about, not any random project that lands on your desk.
Most importantly, all the hard work you put in translates into real money in your bank account, not your employer’s bank account. After thinking about it for some time and saving up some money, you are ready to take the plunge and become a business owner.
There is only one small problem – starting a business from scratch is hard. Either you can’t seem to come up with the right business idea, you don’t know how to come up with a killer business plan, you don’t know how you will drive customers to your new business, you don’t know if there is a ready market for your product, you don’t even know whether the business will work.
The list of potential pitfalls is endless.
So, how do you still make true your dream of owning your own business without having to go through all the trouble of starting one from scratch?
In this case, your best option is to buy an existing business.
When you purchase an existing business, all the difficult tasks associated with starting the business have been done for you. You don’t have to reinvent the wheel.
There are a number of reasons why buying an existing business is less risky than building one from scratch.
An existing business already has existing customers, so you won’t have to spend a lot of time and effort finding your first customers.
You will also get the benefit of immediate cash flow. You will also be sure that there is a ready market for your product or service.
By buying an existing business, you can also save yourself the time and effort of hiring new employees by retaining the existing employees, who will already be knowledgeable about the business.
Finally, when you purchase an existing business, there is a financial history to look at, which gives you a more accurate idea of what to expect, compared to a new business where you have to make do with financial projections, which are educated guesses at best.
It is also easier to secure loans and funding using figures from past business compared to projections.
WHY YOU SHOULD NOT BUY A BUSINESS THAT IS FOR SALE
Once you decide to purchase an existing business, the common approach for most people is to scour websites and magazines that list ‘for sale’ businesses and try to find a business you might be interested in.
The problem is that, very often, the most popular course of action is not always the best, and in this case, going the popular route of snapping up a business that is for sale could turn out to be your biggest mistake. Why is this? What is wrong with businesses that are for sale?
Before I answer that question, I will first need you to engage your imagination for a second. Assume you are an entrepreneur who owns a thriving business. Customers patronize your business by the bus loads, you consistently meet and exceed your sales targets, your business is booming.
Would you wake up one day and decide to put the business up for sale? If you answered no, this should give you an answer to our previous question.
No one just wakes up and decides to put their business up for sale.
Every business you find listed in for sale listings is listed there for a reason. In most cases, the reason is that the business is failing. The business could be failing for any number of reasons.
A powerful competitor might have come into the industry, the business’s products or services might no longer be relevant, the brand might have been based on a seasonal fad or trend, the products or services might have been of low quality, the owner might be experiencing financial difficulties, the list is endless.
It doesn’t matter the reason behind the failure of the business, but buying a failing business is not a very wise move. Unless you have a powerful advantage that will help you overturn the business’s fortunes, you should avoid buying a failing business. In addition, when a business is listed for sale, it attracts several potential buyers.
This shifts the balance of power to the seller and allows them to place a higher price on the business, with little room for negotiation.
This makes the situation even worse for you, the buyer. Not only are you buying a failing business, but you are also buying it at a high price.
Of course, I am not saying that every business listed for sale is failing. Sometimes, there is a good reason behind the owner’s intention to sell. The owner might be retiring, they might be moving or making other major life changes, they might be forced to sell the business due to medical issues, and so on.
However, such situations are exceptions, and it might be hard telling who is selling for a genuine reason. Therefore, it is best to avoid buying a business from the for sale market.
BUYING BUSINESSES THAT ARE NOT FOR SALE
Since it is not a good idea to buy businesses that are not for sale, the secret is to buy a business that is not currently for sale.
The truth is that every business owner is willing to sell their business – for the right price. The key to getting them to sell is making them an offer they can’t refuse.
Of course, I’m not asking you to make an offer worth billions of dollars, like Facebook did when it bought messaging app WhatsApp for $19 billion. No, you don’t need billions of dollars to buy an existing business.
You only need to do your proper research and then come up with a figure that is appealing enough for the owner.
Buying a business that is not for sale has a number of advantages. First, going for a business that is not for sale put you in a proactive position.
Rather than choosing from what is available in the market, you have the option of choosing a business that aligns most with your goals and objectives.
Second, the management of a business that is not listed for sale are more focused on making the best decisions for the future of the company, rather than being focused on making a swift exit. In some cases, you can even retain the management after purchasing the business.
Finally, you don’t have to compete with other potential buyers, which allows you to get the best possible deal.
While buying a business that is not on sale is your best option, it is not as straightforward as buying a listed business. When a business has been listed for sale, you already know the owner, you know they are willing to sell, and you know their asking price for the business.
When a business is not for sale, you might not even know who the owner is, and you are not even sure whether they will agree to let go of the business.
With a business that is not for sale, you have to put in some extra work, but it’s all worth it. Below are the steps you need to follow to buy a business that is not for sale.
Identify Potential Businesses
The fact that you are looking for businesses that are not on the market is both a good and a bad thing.
On one hand, it means you have an unlimited options to choose from. You can literally go for any business that is you are interested in, provided you have the resources to purchase it.
On the other hand, it means that you have to work harder to find these businesses. Unlike on a market where businesses are listed for you, you have to do the work of finding prospective businesses to purchase by yourself.
To identify potential businesses that you might be interested in buying, you need to first decide what industry you want to do business in.
You also need to decide the nature of the business you want to get into. Are you more comfortable with an ecommerce business or a brick-and-mortar business? Are you looking to buy a blog?
You also need to figure out the ideal size of the business you want to purchase.
This will mostly be determined by the size of your budget. You should also consider the location of your ideal business (for brick and mortar businesses).
Once you have decided on the parameters of your ideal business, you can then come up with a list of businesses that meet these parameters and businesses that you can imagine yourself operating.
Once you have created a list of potential businesses that you would be interested in buying, now is the time in to do the hard work. Thoroughly research each of the businesses you identified above and try to find out as much as possible about each of these businesses.
What products or services does the business deal in? What is its pricing model? What is its unique selling proposition? Who are its main competitors? Does it have any legal problems? Is it a franchise? If yes, find out about the franchise company as well.
Conduct a SWOT analysis of the business to find out the strengths and weaknesses of the business and its opportunities and threats. Since you don’t have insider information about the business at this stage, you should conduct the SWAT analysis as though you were starting a new, similar business.
When doing the research, you want to make sure you know everything you can about the business.
The more you know, the better. Not only will it impress the owner once you approach them, it will also allow you to make a more accurate assessment of the business and make it easier for you to negotiate with the owner.
After researching the businesses you identified above, you can narrow your list to two or three businesses that you are actually interested in purchasing. You can now move on to the next step.
Make a Business Plan
Most people assume that a business plan is only useful when building a new business from scratch. This crucial document is useful even when you are purchasing an existing business. Go ahead and prepare a business plans that you will submit to the owners of the businesses you intend to purchase.
The business plan for purchasing a business is, however, a bit different from the conventional business plan.
In the plan, you should include any relevant education and experience you have that make you qualified enough to run the business.
You should include a section that explains how you will handle the transition from the current owner to yourself. You should also include a section detailing the exit strategy of the current owner, explaining the terms and timelines under which the current owner will hand over the business to you.
Finally, you also need to include your financial information – such as assets or financing that you plan to use for the transaction – to demonstrate that you are indeed capable of purchasing the business.
Approach the Owner
Having researched the business and developed a business plan for purchasing the business, you are finally ready to approach the owner with an offer. If you are already acquainted with the person, you can approach them directly and pitch your offer. If you are not acquainted, you can send an email stating your desire to buy the business.
Alternatively, you can send an intermediary to speak to the business owner on your behalf. This is a great option when you want to impress the owner. However, you should make sure that your chosen intermediary is a professional who knows what they are doing.
When making the initial contact, it is wise to share your resume with the business owner so that they can see how your background is relevant to the business. You should also make it clear that you have no problem signing a non-disclosure agreement before being allowed to look at the documents pertaining to the business and its operations.
When you follow the above steps, there are four possible outcomes. The first one is that they accept your offer, in which case you have achieved what you wanted. The second possible outcome is that they ignore your offer.
This could be an unspoken refusal, or they could have missed your email. You can follow up after some time to find out whether they missed your email or whether they are not interested in your offer. The third possible reaction is to receive a weak rejection, which opens up room for negotiation and closing the deal.
The final possible outcome is to receive a strong rejection, which means that the owner is not even remotely interested in selling the business. In this case, you can move on to the other businesses you identified earlier.
THINGS TO CONSIDER WHEN BUYING A BUSINESS
Before buying a business, you also need to evaluate it to determine whether it will be successful after you take it over. You don’t want a business going under a few months after you take over.
Once negotiations are underway, ask the business owner to provide you with detailed information about the business and its operations.
This information will also help you in valuing the business. You can even bring in a second pair of eyes, such as a business accountant or a business lawyer, to go through the information with you and ensure that everything is in order before you go through with the transaction.
Some of the things you should closely look at before signing on the dotted line include:
When buying a service based business, you don’t have to worry about placing value on the inventory. If the business deals in physical products, however, you have to find out value of the inventory that is in stock.
You will need to first conduct a physical inventory to determine the quantities of all products and materials that are in stock.
You also need to look at the physical condition of the inventory and think about how you are going to sell the products. If the products are old/outdated or in bad shape, you might have to sell them below their full value, therefore you need to put this into consideration when valuing them.
Very often, the inventory will not be worth the amounts shown in the books, therefore it is a great idea to have the inventory appraised to determine its exact value before buying.
Equipment, Machinery and Other Assets
What equipment and machinery does the business rely on for production? Does the business own these equipment or are they leased? What is their value? When valuing machinery and equipment, you should factor in their current condition as well as depreciation.
You also need to find out whether this equipment is tied to any outstanding debt through equipment financing. Assets will also include any real estate owned by the business. Assets may also include any non-physical but valuable goods owned by the business, such as the brand, goodwill, patents, and trademarks.
Valuing this intangible assets is a lot more challenging compared to tangible assets, and should be done with the help of a qualified business valuer.
Examine all the financial documents associated with the business you want to buy. These include sales records, financial statements, all accounts payable, all accounts receivables, tax returns, and so on. Going through these documents will give you a clear picture of the business’s overall earning power and a feel of the cash flow within the business.
Financial documents can be a bit complex sometimes, so it is a great idea to enlist the help of an accountant who is familiar with that type of business to help you make sense of the documents.
Legal Documents and Contracts
Thoroughly examine any document that is legally binding to the business.
These include employee contracts, leases, sales contracts, purchase and distribution agreements, and so on. Going through these documents ensures that you are aware of what exactly you are getting into.
You should also look at documents like articles of incorporation, business registration documents, patents, registered trademarks, and so on.
This will give you a good picture of where you can do business or not, the structure of the business, as well as any intellectual property that you will have access to after buying the business.
Outstanding Debts and List of Liabilities
Very often, businesses operate using loans and debts. While this is not a bad thing, you want to make sure you know about any existing debt before you take over the business, since the debt will be transferred to you after you buy the business.
Confirm whether there are suppliers and other business partners who are owed by the business.
You should also confirm whether any of the business assets, such as equipment, capital, or accounts receivables are tied to any loans. You also need to confirm whether any of the business’s assets have been put on lien by creditors.
Location, Market and Customers
It is also a good idea to get a feel for the business’s location (for brick and mortar businesses), market and customers. Where is the business located? What other businesses are in the surrounding area? Are there any competitors nearby?
What is the market for the products like? Who are the business’s greatest customers? What are the customer patterns? When does the business have the highest sales? Does the business rely on new or repeat customers? Do the customers pay in full or on credit?
Finding the answers to these questions will help you determine whether the business is right for you and whether it will survive after you take over.
For instance, if the current owner has built great relationships with customers, making the customers loyal to him rather than the business, you might lose a huge portion of these customers after you take over the business.
Buying an existing business is a great way to become a business owner without having to go through the struggles and challenges of building a new business from scratch. Once you decide to buy a business, however, don’t go for a business that is already on sale.
These businesses are usually on sale because they are not doing so well. Instead, identify a business that is not on sale but one that aligns with your goals and objectives, research about it, and then approach the owner with an offer to buy.