How To Buy a Small Business That Is Right For You

Every week as SmallBizLady, I conduct interviews with experts on my Twitter talk show #SmallBizChat. The show takes place every Wednesday on Twitter from 8-9 pm ET. This is excerpted from my recent interview with Nunzio Presta, @mybizon.

Smallbizlady: WHY WOULD SOMEONE BUY A SMALL BUSINESS?

Nunzio Presta:There are three main reasons a person becomes a business owner: Professional Independence, Financial Reward, and/or Personal Fulfillment. These all apply, but there can be other perks – including possibility of faster return on your investment (ROI) and offering a product or service that is already proven in the marketplace. Ask yourself: Do I prefer a ‘ready-made business’ versus creating something from scratch? Do I prefer working with a system to be completely independent? Do I have problems following policies built by others? The answers to these questions will guide you to determine if buying a small business is right for you.

Smallbizlady: HOW DO YOU KNOW BUYING AN EXISTING BUSINESS IS RIGHT FOR YOU?

Nunzio Presta: If you are energetic, tenacious, and open to pursuing opportunities in niche industries, then it’s right for you! Some of the pros for buying an existing business include:

Track Record – Existing businesses have an established customer base, employee and support team, a business plan in place and operating systems.

Income—The best acquisition targets are likely to already have solid sales and profits. So, you hit the ground running with cash flow.

Financing— It is often easier to secure financing for a small business because the assets of the company you are buying can be used as collateral and the track record demonstrates the performance you can expect.

Smallbizlady: WHAT ARE THINGS TO LOOK FOR WHEN BUYING AN EXISTING BUSINESS?

Nunzio Presta: First, the business should be established and growing slowly with recurring customers. This is the perfect recipe to grow the business and take advantage of a stable opportunity, while reducing risk. Then, I cannot stress Due Diligence enough: Examine closely the reputation and the numbers associated with the financials and projections of the business. Finally, take the time to forecast the future. The business may look attractive now, but how about 5 or 10 years from now? What are market trends or industry changes that are going to provide opportunities or create threats for your success?

Smallbizlady: IS THE ROI ON PURCHASING AN EXISTING BUSINESS GREATER THAN OTHER INVESTMENT VEHICLES?

Nunzio Presta: This depends largely on the amount you have in cash vs. the amount you need to borrow. The annual return on an existing business is often better than traditional investments which usually yield under 10%. Depending on the business, most existing business purchases within the #BizON marketplace yield an annual ROI of 25%+. However, a poor choice can cause the acquisition to become a sinkhole for your time, money and other resources. There is no substitute for doing your due diligence when it comes to answering this question.

Smallbizlady: HOW MUCH SHOULD YOU PAY FOR A SMALL BUSINESS?

Nunzio Presta: The purchase price of a small business is usually based on a multiplier of the most recent year’s EBITDA. The multiplier you will use depends on the industry of the business you are buying. However, it truly comes down to your budget an how much you are willing to spend! As a guideline, #BizON members rely on a benchmarking tool that shares what the average asking price is per industry. This tool will help you to compare and analyze businesses you are interested in.

Smallbizlady: WHAT KIND OF PROFESSIONAL TEAM DO YOU RECOMMEND WHEN CONSIDERING TO BUY AN EXISTING BUSINESS?

Nunzio Presta: First, have the financial professionals in your corner. Make sure you have a good banker who is familiar with small business and who can be flexible to your growing needs. Next, have an accountant who is familiar with your situation and can help guide the purchase and growth of your business. Then, make sure you have an attorney who is familiar with the small business marketplace and the industry you are buying into. All these professionals will cover the most vital issues and answer the most pressing questions during the acquisition.

Smallbizlady: WHAT IS ONE THING YOU WOULD WANT A SELLER TO EXPECT FROM A BUYER?

Nunzio Presta: The transitioning period is one of the most important things a seller should expect from a buyer. A buyer should let the seller stay onboard for at least 3-6 months in order to ensure the transition is smooth. Remember, as a new owner, you are not familiar with absolutely everything – all of the processes, policies, and financial models. Also, the reputation of the business is often critical to maintain your customer base. Sellers should be prepared to ease the transition for you.

Smallbizlady: WHEN NEGOTIATING THE PURCHASE AGREEMENT, WHAT IS ONE KEY TERM TO KNOW?

Nunzio Presta: The key term to know is whether you are purchasing the assets or the shares (stock) of the business. If you are purchasing assets, you will be able to want. The downside to purchasing assets is that the purchase price may be higher because of transactional considerations, including transfer of title. You may lose “carry-forward” tax benefits and other tax credits. When you purchase shares, it is easier to continue operations, and you can avoid taxes associated with transfer of title. But, you will also acquire all of the businesses existing problems, including employees you may not want to keep. Many of the problems will be disclosed, but many also are undisclosed when you purchase them.

Smallbizlady: IS BUYING AN EXISTING BUSINESS RISKY?

Nunzio Presta: It’s definitely less risky than starting your own business. When you consider that at least 50% of businesses will fail before 5 years time, a proven business can look very attractive. When you buy an existing business, it is already established – with customers, a business plan, and (usually) cash flow! This allows you to focus improvements to the business and growth. Of course, owning your own business does have risks and you should always seek the advice of your financial and legal team before you buy.

Smallbizlady: WHAT ARE THE PROS AND CONS TO BUYING A FRANCHISE VS. BUYING AN EXISTING BUSINESS?

Nunzio Presta: Part of the attraction of the franchise business model is of course, the system. However, to work well, the system must work for you!

Pros to buying a franchise include:

• An operating system that is easily replicated, formal training programs, marketing and advertising plans.
• Franchises are usually easier to obtain financing for – because they have a proven model, support, and track record.
• Purchasing power with suppliers that can translate to significant discounts
• An existing support staff who is experienced in handling issues specific to the business.

Cons to buying a franchise include:

• You are subject to the rules of the franchise and you must follow them. For instance, if you’re a franchisee of a certain hardware store, you must carry certain items for inventory.
• The legal documents are complex. Buyers must be presented with the FDD before they can purchase a franchise business.
• Your local reputation is only as good as the franchisors
• You are limited in the products and services you can offer.

Smallbizlady: WHERE WOULD YOU LOOK FOR EXISTING BUSINESS OPPORTUNITIES?

Nunzio Presta: On the #BizON marketplace of course! BizON has diversified opportunities from various industries from across Canada, the USA & Australia. The marketplace is doing a great job attracting and connecting engaged buyers and sellers by providing them with a positive user experience that is seamless, resourceful and supportive. Join now for free – mybizon.com/join

Smallbizlady: IF YOU HAD ONE PIECE OF IMPORTANT ADVICE, WHAT WOULD IT BE?

Nunzio Presta: Know if you want to purchase a small business or franchise and what the differences are. http://bit.ly/1VN6Bwf. We’ve covered much of this – buying a franchise offers built-in customer base, a proven model, training & support. Buying an independent business gives you more control, but more responsibility – so, there is more opportunity, but more risk! Also, an independent business gets to keep all of its earnings because there are no fees or royalties to pay. Don’t forget to engage your financial and legal team in your purchasing decision once you have decided the kind of business you want to buy.

If you found this interview helpful, join us on Wednesdays 8-9 pm ET; follow @SmallBizChat on Twitter. Here’s how to participate in #SmallBizChat: http://bit.ly/1hZeIlz
For more tips on how to start or grow your small business subscribe to Melinda Emerson’s blog http://www.succeedasyourownboss.com.

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