Seeking a quicker way to the top? Daunted by the demands of starting a business from scratch? Want to benefit from lessons learned by successful business founders? Perhaps you should consider buying a business. In most cases, it's a safer bet than starting a company your own.
New businesses started from scratch have a failure rate of more than 90 percent during their first five years. But half or more of all businesses that are sold survive at least the first five years of new ownership, according to Kent Foutz, a professor at West Chester University in West Chester, PA.
In fact, buying a business, turning it around, then selling or operating it for a profit is one of the fastest routes to entrepreneurial success. However, "Don't look only for companies that are in trouble or losing money. Purchasing a successful, profitable enterprise often is the best way to go," says Gary Benson, director of the Entrepreneurship Program at the University of Wisconsin in Whitewater.
While logic tells you that successful, profitable enterprises are rarely for sale, there are several kinds of situations in which good businesses become available:
The owner becomes sick or dies and there's no obvious successor in place division. A business owner has decided to cash in sooner, rather than later, on his or her creation.
A partnership is dissolving. An owner is selling a business as part of a divorce settlement.
Good businesses may be more available than you realize. Just because the enterprise is surviving, or even profiting nicely, doesn't mean its founder wants to stay with it forever. Many entrepreneurs say they simply need to move on to the next challenge.
My own experience consulting to companies that are seeking to make acquisitions indicates that at least in the industries in which I specialize owners of many of the top businesses in the field are willing to at least listen to an offer. Very few reject a buyout approach out of hand, and many will entertain a serious discussion almost anytime. Under the right circumstances, a very high percentage is consistently available, even if the price is high.
Cash Flow Is King
If, in fact, you develop an opportunity to purchase a solidly performing business, you'll have a much better chance of finding financing than you would if you were starting with nothing. The magic words in commercial lending today are "cash flow." If you've got it, banks will work with you. If you don't, it's much less likely.
New businesses don't have cash flow; ongoing ones do and, even if the business you're eyeing isn't generating a profit, lenders will often find merit in your idea based simply on revenues. This becomes all the more likely if you can demonstrate a few ways to cut costs. But it all begins with a known quantity a market for your goods or services as evidenced by some kind of revenue stream.
"Known quantity" is a key phrase here. When you buy a business, you'll likely be borrowing more money than if you were starting one. So it's that much more important that you're aware of all current and potential problems. You may think a company has a good reputation until you discover too late that it has severely disappointed some key customers. And you're always taking a chance that, after you take over, several key employees, suppliers or customers will bail out because of the change at the top, or by coincidence at a time when you can least afford it.
Therefore, virtually all experts on business buying advise careful study of a target organization's finances, reputation and relationships.
How and Where to Go Shopping?
But first, you've got to find an attractive business to buy. What's the best way to go about it?
Joseph Mancuso, founder of the Center for Entrepreneurial Management in New York, says the key is to put yourself in the flow of a steady stream of business opportunities. This has several benefits:
It gives you more choices. You'll develop skill in evaluating opportunities. The experience in looking at potential deals will help you refine your own criteria.
There's one danger in putting yourself in the middle of a big stream of business opportunities: you'll get into the habit of turning down deals, which can begin to work against you.
Eventually, referrals will dry up. The way to avoid this trap is to be committed to pursuing an opportunity that meets your criteria; and to work hard on your criteria so that when you find a deal that meets it, you can move forward with confidence. (That includes broadening your criteria if you can't meet the dream specs, but don't want to abandon your overall goal.)
If you're committed, set solid criteria and evaluate lots of possible deals, you'll be more likely to feel good after choosing one. You'll know it was an informed choice, which goes a long way toward maintaining your enthusiasm down the road.
So where do you find that steady stream of opportunities? And how can you avoid the sea of ill advised ones? The basic strategy for this is to emphasize what Mancuso calls "positive deal flow techniques." That is, if you sit back and wait for opportunities to appear, using only one or two sources, you're not likely to hear about the most attractive deals the ones that never get advertised. But if you take the active position of considering nearly everyone you deal with as a potential lead to a great opportunity, you're building "positive deal flow."
