Coast River Business Journal: Recession work strategies: Buy a business, buy a job? - Feature Story

Coast River Business Journal: Recession work strategies: Buy a business, buy a job? - Feature Story

Volume 5: Issue 8 - 08/01/2010
By Joanne Rideout

The old saying that necessity is the mother of invention is certainly proving true in the recession when it comes to business. With unemployment high and retirement accounts in crisis, many people are now taking stock of their lives in a new context, and looking for other alternatives to make a living.

One option for former employees is to shift into entrepreneur mode and take the plunge into business ownership. For some, that can mean buying an existing business.

But is it a reliable and prudent strategy to in essence buy yourself a job – one where you can’t be fired because you’re the boss?

To assess the pros and cons of this approach, CRBJ checked in with Mark Thompson, business counselor with Clatsop Economic Development Resources, based in Seaside.

Buy a business?

Thompson said buying a business can be either a good idea or a "big disaster," depending on the motivation of the person who’s buying.

"Are they doing this because they want to be an entrepreneur and have all the joys and heartaches that go along with that?" Thompson said. "Or are they doing it because they don’t feel they have any other options? That’s the acid test."

Thompson said many people who end up buying a business have thought about it for a long while, until necessity finally pushes them into making a decision.

Financing

When people buy homes or vehicles, they typically take out loans. Thompson said entrepreneurs also often seek business loans when they buy companies, and it can actually be easier to get such financing than other types of loans.

"If it’s an existing business, there is something of substance that someone is buying," Thompson said. "Bankers look favorably on that situation as opposed to looking at something starting from scratch."

Some business purchases offer owner-financing, which can be a good deal in some instances, he said.

"That’s if you can find reasonable terms from the seller," Thompson said. "If they are willing to carry the financing, they usually want a higher price. But it can be a good deal for both parties."

Thompson said the major risk in such an arrangement lies with the seller, who can end up getting the business back if something goes wrong, but could end up with a business venture that is in worse condition than when they sold it.

When entrepreneurs buy someone else’s company, "you’re looking at a business that’s been operated by a certain manager or team in a certain way," Thompson said. "There’s no guarantee that you will be able to operate it the same way. Will you be able to maintain success and maintain things that need improving?"

People who have been employees can underestimate the enormity of the role of "owner," which can involve a huge time commitment and uncertain pay.

"It’s hard to really appreciate the responsibility of having all of the hats that owners have to wear," he said.

He said people need to assess their risk-tolerance level, and whether they will really enjoy the role of entrepreneur, since it will take up much more of their time, in general, than a job.

CEDR staff can help people sort out their business ideas and help them evaluate how they would operate a business compared to the way it’s been done in the past.

"We can even provide some assistance to decide what a business is worth," he said.

What price?

How much should you pay for an existing business?

Thompson said it comes down to what a buyer and seller agree upon.

"There are standard approaches to business valuation that can be as simple as adding up what assets the business has," he said. "How much equipment does the business own?"

He said another approach to business valuation is to look at the profit or cash flow potential of the business, looking back on how it has fared in the past, and making reasonable projections as to how it will do going forward.

A third, popular valuation method is called "multiple of sales," in which gross sales are multiplied by a factor of four, five or six, for example. The method is used most commonly with large companies. He said in the coastal economy, most businesses tend to be small and unique

"This is the simplest model to apply but the least accurate," Thompson said of the multiple of sales approach. "It may be true in aggregate, but for businesses that don’t fit the standard profile it doesn’t work."

Another option for business ownership is the franchise, where an entrepreneur purchases a business with a recognizable brand, and becomes part of a larger network of stores. Examples of franchises are Subway and McDonald’s fast-food businesses.

"The advantages of franchises are that you are buying preexisting business systems," Thompson said. "Franchises have spent a lot of money and time finding a business model that works, as long as you operate it properly."

He said franchise fees and ongoing royalties paid to the parent company are part of the price of doing business as a franchise. Whether this business model works for an individual depends on their approach to life.

"It depends on whether you want to depend on your own dream and vision, or can be happy with a pre-existing one," he said. "It all comes back to the first question: ‘Do I really want to own a business?’"

For more information about purchasing a business, contact CEDR at www.clatsoped.com. Other resources also are available through the Oregon Small Business Center Network, at www.bizcenter.org.