Buying And Financing A Business

This is something I always wanted to try but haven't--

Put a half page ad in the local paper saying sincere, hard working entrepreneur wants to buy existing business.  Any industry considered.  Please call ---.

I've looked at a lot of businesses and almost bought one once but didn't and now glad I didn't.  But this approach might be interesting for someone, perhaps like you, that is sick of office politics and measly annual pay increases and just working for the Man.

Here's why you might want to consider buying a business rather than starting a business.  An existing business is already started.  It has a track record, probably makes money and may be positioned for growth.  A wise man once told me that people who want to start their own business are investing in dreams.  Buying an existing business is buying a proven, but perhaps underperforming, asset.   

Why?  Because a business is nothing, the management is everything.  Well, I mean you don't want to buy a business with an obsolete product--nobody wants to own the eight track market but products usually don't go obsolete.  Their owners do when the owner get old or bored or sick or tired.   And they are usually stuck.  Here's why.

Let's assume a successful smallish company throwing off a decent living for the owner.  But it is hard work or maybe it isn't.  Like I said maybe he/she is bored, tired or sick.  Wants out, but how because most of what he has is in the business.  Or maybe he has a lot but knows the business is worth a lot but can't find a buyer.

Why wouldn't a viable business be able to find a buyer?  Oh, they can but not for the price the owner wants.  Not in cash, anyway, because most businesses don't have assets to justify a high price.  Huh? 

A quick finance lesson--if a company makes $100,000 in operating income it will sell for between $400,000 to $800,000 because a broker will say this business should sell for, say, five times earnings or $500,000.  Or four times or eight times.  Let's also say the company has hard assets--plant, property and equipment, receivables, inventory--of $200,000. 

So the buyer wants $500,000 but the hard hearted banker will only give the buyer $200,000 to buy the business because there are only hard assets of $200,000.  Actually, this banker is a bad one because really hard hearted bankers will lend only a percentage of the hard assets.

So how is the seller going to sell his business for $500,000 and how are you, you who don't have a dime, going to buy it?

Easy. 

OK, so the owner wants $500,000 and the banker will only lend $200,000 because of the hard assets.  Better yet, let's just say the bank won't lend anything.  They are out of the picture.  Bankers will lend money when you don't need it.  When you have lots of assets they will lend you the money but not before.  Mark Twain said a banker is a guy who will lend you his umbrella when it's not raining. 

But you really want this business because the seller is old, but smart, has built it up but isn't pushing it right now because he's old so there is potential and you are young and bright and smart and going nuts working for a bunch of other nuts.  But you have no money.  So you start looking around and the guy that comes to the rescue first is the business broker that is probably doing the deal.  He has a long list of non-bank lenders who will, maybe, perhaps, do the deal--for an interest rate that would make a credit card company blush. 

And you will talk to them because they will give you an idea of the feasibility of the business.  If they are willing to do it, you probably have a viable company to buy.  But adding their interest expense to the project may sink it and then they get the company and you get the boot.   They also may not do it because you are young and inexperienced.

OK, what do we do?  If you haven't figured this out yet you should probably reconsider buying your own business because you have to think.  So think. 

Who has the money?  Who has the opportunity?  Who knows the business?  Who has the willingness to lend you the money?  That's right--THE OWNER.

He won't want to.  He wants his money now, he wants to quit, get out of Dodge. 

But he also has a bunch of incentives to finance your purchase and they are--

1.  Better tax treatment because he receives his money over time, in installments.  He pays less tax because the IRS allows this and it is know as an installment sale.  Those guys at the IRS have a way with words.

2.  He gets more cash.  He charges interest.  Not credit card interest but a better rate than a money market.

3.  He gets a better price because you are willing to pay more to get the financing.

4.  He gets the business back if you screw up or default.

What you get is the money, the business, and a mentor that will steer you away from screwing up the business.

Go for it.

 

Comments

[Matthew Engquist]

Not all owners do this, but some owners help smooth the transition by helping finance the new owners in the purchase of the business through a mechanism called seller financing. Some also impart a few tips on best practices in handling the business. Since you've said that the owner will charge interest on the new ones, selling that business can still be considered a good investment without going to the banks.