When you get the itch to be an entrepreneur, you have options. You can build a business from scratch, you can franchise a business from another brand franchisor or you can buy a business from another entrepreneur looking to exit.
Getting a business going is the most difficult part of a business’ lifecycle, one that most new businesses do not survive. So, you may follow the path of logic that you minimize that startup risk by buying an established business. While it costs more money up front, you may think that an established business track record, vendor relationships, knowledgeable employees and a customer base will allow you to hit the ground running.
However, as with everything related to business, it’s never that easy. Buying a business can sometimes be equivalent to taking over someone else’s problems.
Here are some things you should know before you engage the purchase of any business.
Here’s the thing about people—and entrepreneurs are no exception—they are greedy. Their greed is something that you need to understand when you consider buying a business.
If a business is doing well and the owner expects it will continue to do well, most entrepreneurs won’t want to part with it. I have advised dozens of businesses to sell when they are nearing the peak of their growth rate, knowing that they will get a premium price for selling their business at that time. In almost every case, business owners don’t sell when things are going well. They have visibility on future growth because they think that they will be missing out on more value (this is often referred to as “leaving money on the table”).
In fact, the greedy entrepreneurs want to wring every penny out of the business, so they convince themselves that if they can wait just another year, their business will be worth more, and then, they will sell it. When the next year comes, they go through the same rationalization.
Ultimately, when they see an upcoming business speed bump (or sometimes, encounter a total catastrophe), they decide to sell. This means that when a business is up for sale, often it is because things are going south, or the writing is on the wall that something negative is on the horizon. So, you should just assume going into your evaluation process that you are going to be inheriting someone else’s issues, whether they be minor or major.
Entrepreneurs are Good Salespeople
When the entrepreneur puts his or her business up for sale, it's his or her job is to sell it and it benefits the entrepreneur to portray the business in the most positive light possible. The owner, and potentially the owner’s advisors, will tell you that the business is only for sale because of some believable reason; retirement, a move or some other story that may even be true in part, but is also part of the marketing spin of the sale process.
If the entrepreneur really loved the business and thought it was going to continue to grow and increase in value, would he or she be walking away entirely – or finding some way to keep a hand in the cookie jar?
See point one about “greed” above.
You Don’t Have Perfect Information
When you meet the current owner, whether the person seems savvy or not, he or she will have one important thing you will never have before purchasing the business – full information. Information is power, and in relation to this new business, you are at a significant disadvantage in the area of information.
The current owner knows every in and out of the business, from previous issues to current issues to the status of the relationships with the vendors. He or she knows how much of the business is reliant upon him and his or her connections (and how hard it may be for you to take those over once the owner leaves). This individual knows which employees are gems and which, frankly, suck, as well as how much productivity comes from each employee.
The owner knows which employees will probably quit after the business is sold. He or she knows which systems are out of date, which equipment is on its last leg and what his competitors are up to that jeopardizes the company’s very existence.
There are also things the owner probably doesn’t even realize about his or her own business. Whatever the case, these are things that you will not know and are very hard to evaluate through a due diligence and inspection process.
Regardless of what you ask, the owner will put a positive spin on the answers (see the “good salespeople” point above). The owner may not straight up lie, but since his or her objective is to sell the business, creative answers will be given to your tough questions.
Additionally, you are never going to be able to ask all of the questions that you want and get access to every piece of information necessary, as the sale process is usually confidential. While you would love to interview top vendors, customers and employees, you may have limited or no access to them, as such conversations could put these relationships with the company in jeopardy if these important entities believe that there is a sale process going on. So, you will always be at an information handicap when evaluating the business.
You Still Need to Run a Business
Additionally, just because you are buying a business rather than starting one from scratch doesn’t mean that the basic tenets of business don’t apply. They do. You still have to answer to your customers; in this case, you must hope that the customers you “paid for” when buying the business don’t use the sale of the business as an opportunity to leave or renegotiate terms. You still need to be a manager and you have to hope that the employees you “paid for” when buying the business don’t use the sale process as an opportunity to quit, demand a raise or slack off. You still need to be able to multi-task and wear different hats.
You still have costs and expenses. You still have to manage cash flow. You still have to work; businesses don’t run themselves.
Buying a business may let you start at “square two” instead of “square one” in many regards, but don’t think that it guarantees your success. Approach a purchase prudently and be aware of the issues above to better your business success odds.
About Carol Roth
Carol Roth is the creator of the Future File ® legacy planning system, “recovering” investment banker, billion-dollar dealmaker, investor, entrepreneur, national media personality and author of the New York Times bestselling book, The Entrepreneur Equation. She is a judge on the Mark Burnett-produced technology competition show, America’s Greatest Makers and TV host and contributor, including host of Microsoft’s Office Small Business Academy. She is also an advisor to companies ranging from startups to major multi-national corporations and has an action figure made in her own likeness.
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