The best head-start on opening your small business is buying an existing one
Starting and growing a successful business is very difficult. It can be done, of course, and new successful businesses are begun every day. However, the vast majority of startup businesses fail within the first two years.
For those with an indomitable entrepreneurial spirit, there is another solution. Buying an existing business may offer a shortcut to success. This is not a path for everyone and it is fraught with pitfalls so make sure you are well prepared.
An existing successful business has already gone through the growing pains and has established market share or a niche market of its own. A buyer should look for a business that has more room to grow because he or she might have to increase sales and profitability to pay off the potential note to the business. Good opportunities may exist with sellers who have operated their business for many years and are now looking to retire.
Be aware, however, that most business sellers are looking to get out because their businesses are not doing well, so you have to do your homework and due diligence. Get a good accountant to review the books. Conclusively establish the true profitability of the business. Many small business brokers set the buyer's value of a small business at 3 to 4 times the actual net income of the owner. A seller is often looking for 5 to 6 times the net. It's best to take the average of the net over the last 3 to 5 years for a more accurate picture of true income.
If you are fortunate enough to be well capitalized you should still resist paying all cash. If the seller continues to carry a note, he will be much more likely to continue to be accommodating in helping you after the sale.
Look for that "diamond in the rough", a profitable business with a documented history of success and an owner who is looking to retire for legitimate reasons of age or health. Clearly envision how you can grow the business utilizing your experience, expertise, vision, work ethic and intelligence. Negotiate a fair price. Put your imprint on the business and make it your own.
About the author
Holly Perlowitz, CPA, serves as Business Development Manager for Community Capital New York. An experienced financial services professional with expertise in lending, operations, compliance and accounting/finance, Holly began her career in public accounting with Deloitte, followed by Chase and then Emigrant Bank, where she held a senior management role at Emigrant Mortgage Company.
She holds a Bachelor’s Degree in Accounting from St. Thomas Aquinas College and an MBA from Fairleigh Dickinson University and has served on the Board of Family Services of Westchester, the Advisory Board of the Center for Financial Education and chairs a committee for the Relay for Life Event in Ossining.