Buy a Business and Save Money | Articles

Buy a Business and Save Money | Articles

Posted by valeri on July 9, 2010 · Leave a Comment

Buying a Non-Performing Business

Most people shop for a business that is generating a good profit. But sometimes you discover a business that is either not making money, or because of the record keeping habits of the owner, profitability is difficult to verify. While walking away from these is the general word of advice, some of these businesses make great investments for the right person.

If you are ready to own your business, Legacy Venture Group, Inc. suggests that you consider a non-performing business, but only if you are certain you can improve it. One of the best advantages of investing in a non-performing business are that you can command a great offer price for the business and you can get started rapidly.

Find Business You Can Improve by Better Management: Keep in mind that most non-performing businesses generally suffer management challenges that can be significantly improved. Michael Gerber, author of The E-Myth, says “If they don’t fail outright, most businesses fail to fully achieve their potential. That’s because the person who owns the business doesn’t truly know how to build a company that works without him or her… which is the key.”

Look for companies that are not executing business basics well that you have skill and expertise in; look at the company’s customer service, marketing, measurement and control programs, financial management, and processes and systems. Make observations and understand how the seller manages the business. Many business owners start off creating companies around a technical skill they have, but they never develop a thriving business that can sustain the rigors of the marketplace.

Hold Off Spending Money on Physical Improvements: Avoid buying existing businesses that require tons of capital to get the business up and running right. This does not mean that you have to wait to find the perfect business that fits your dream image. If the business has a leaking roof, or has a bunch of broken equipment that is essential for its operation, then you may want to keep looking for another business. But if the changes that the business needs to be profitable are primarily managerial, you should consider whether you can lead the business toward success

Hold off on the remodel or the big capital investment – at least for a several months. Fix the managerial needs first and see how the business runs. Build up cash flow. You might discover that you don’t need as many capital improvements as you initially thought. You might discover that your vision of change has adjusted after running the business, allowing you to make even more effective improvements tailored to your client’s needs and wants.

Always Create a Written, Organic Business Plan: No matter whether you are starting a business from nothing, buying a new franchise, or buying an existing business that is doing well, you must have a plan. It needs to be in writing and specific. It does not have to be long and laborious, but you need to put a great deal of thought, research and knowledge into it. Share it with others you respect – people who care enough to challenge you.

Make your business plan organic; you need to continually make sure your plan fits the current conditions of the market place. But always have a written plan. Don’t fool yourself by thinking you can keep it all in your head. Others need to understand it as well. If you don’t have the time and energy to put a plan in writing, don’t bother investing in a business.

Compare the Non-Performing Business to Starting a Business from Scratch: Other than the lack of profitability, does it meet many of your needs and wants. Create a list of needs and wants of your ideal business (location, size, equipment, etc). Compare it to other business investment options. Many times you can get a non-performing business, or even a closed business with all the assets in place, for much less than it takes to build a new one. Talk to anyone who has built a new business from scratch and ask them how much it cost to get it open. Remember to consider build-out costs, permits, cost overruns, and all kinds of expenses that are easy to overlook when planning. Factor in the expense of not being in business while you are in the planning and build-out phase which often goes longer than you anticipate.

We see many clients struggle to find a perfect business. However, most people I know who build businesses, especially for the first time, come to realize there are many things they wished they had done differently and that what the nave built from scratch still was not perfect. Choose something you can live with and improve.

Compare to Buying an Existing, Profitable Business: Realize that a profitable business will typically demand much higher price compared to a non-performing or closed business. If you can fix the managerial aspect of the non-performing business, and apply your business plan effectively, you might be able to save a great deal of money.



Non-Performing

Start-Up

Existing

Closed but Set Up

Current SDE – monthly

None, Little

None

Med to High

$0

Cost to Get In & Doors Open

Low

High

High (figure 2.5 times SDE)

Low

Cost to build-out

Low

High

None

Low

Cost to Market the Business

High

High

Low

High

*SDE – Seller’s Discretionary Earnings or the total economic benefit the owner derives from the business; for larger companies one might consider EBITDA

Below is a very simple example. It is not designed to give you real figures, but to provide an idea of how to layout and compare choices.



Non-performing

Start-Up

Existing

Closed but equipped

Example

Pizza Shop #1

Pizza Shop #2

Pizza Shop #3

Pizza Shop #4

Current SDE – Monthly

$0 – Breaking Even

None

$5,000 / m

None

Cost to get In

$50,000

$0

$150,000 (2.5 x SDE)

$10k Transfer / finders

Build Out

$10,000 – New sign, paint…

$175,000 – Equipment, build out, permits…

$5,000 – minor modification

$10,000 – New sign, paint…

Marketing Cost – Monthly

$500

$500

$500

$500

Expected Opening Time

1 month

4 months

0

1 month

Cost of not being open

$1,500

$9,000

$0

$1,500

SDE at 6 months

$4,000 (assume $0 until then)

$3,000 (assume $0 until then)

$6,000 (assume $5,000 until then)

$3,500 (assume $0 until then)

SDE at 12 months

$8,000

$8,000

$8,000

$8,000

Total 12 month Cost including start-up & marketing

$67,500

$192,000

$161,000

$27,500

Estimated SDE in first 12 months

$24,000

$18,000

$66,000

$21,000

Next 12 months

$96,000

$96,000

$96,000

$96,000

How Much Should I Pay?: Remember the rule – “buy potential, pay for performance” (from http://www.ThinkingOutsideTheBoss.com). The price should be significantly less than the cost to create a brand new one in a similar location, or buying a profit-yielding business. If the performance of open non-performing business is zero or negative, look at the asset value – tangible and intangible. Tangible assets include the value of equipment, vehicles, and computers. Always consult with your accountant for deeper understanding of business financials.

Intangible assets include things like the reputation, brand, and the fact that at least some customers are coming in. Most buyers fail to recognize the intangible value of the business. Remember to do your research on the cost of a start-up; seek input from one or two people who have created similar businesses in the last few years. Take into account the cost of getting started and going for a period of time without cash flow.

Summary: Many businesses are not making money because the right management processes have yet to be put in place. Shopping for businesses during an economic decline following a flourishing economy provides great opportunities for business buyers. Many businesses that did well in a thriving economy struggle in a sluggish economy. As a result, many such businesses have come on the market. It is worth considering businesses that interest you, to determine if your skills and abilities make it worth taking advantage of the savings you can experience by purchasing a non-performing business. For more tools and tips, visit http://www.BuyBizUSA.com. Good luck in your search. Buy a business, begin a dream.

Founder of Legacy Venture Group and BuyBizUSA.com. Supporting the transition of business ownership for companies under $20MM in sale. Certified Business Intermediary from IBBA. MBA and Florida Licensed Broker.