Getting a business off the ground is hard.
Many people have chosen to get started by buying a business instead of starting one. If that idea sounds good to you then here is the #1 key concept that will maximize your chances of success:
Look For A Good Business You Can Make Great – Not A Failing Business That You Must Save
There are many reasons to adopt this conservative approach. But two stand out as the most important.
Reason #1: Things usually take longer and cost more than the new owner anticipates
Cheap businesses are everywhere. You can always find a business where the owner is burned out, has lost interest or has made some really bad decisions in recent years.
And you can certainly buy this type of business for less money then it’s more successful competitor. And it is possible that you can identify the mistakes that have lead to the business’ demise and you can implement the fixes.
But if you don’t have extensive experience turning around a business in the same industry how do you know how long the turnaround will take?
The harsh reality is that without lots of experience all you can do is guess.
How long can you afford to lose money while you put your plan into action?
Despite all your great preparation and study there will still be much you don’t know. There are bound to be details about running your new business that you will be unaware of until you are on the inside working it every day.
It’s hard to learn how to steer a ship. And it’s even harder if it the ship was sinking before you came on board.
And that leads us to the second reason you should avoid buying a failing business.
Reason #2: There are more good business for sale then there are buyers
Recently BizBuySell.com, the largest business-for-sale website on the Internet, released their annual survey of businesses sold through their network in 2013. The data is an eye-opener.
The total number of businesses sold through the site’s brokers rose an amazing 49% over 2012. But the average selling price dropped by 3% when measured as a percentage of cash flow. And their data for the first 6 months of 2014 shows these trends holding steady.
According to BizBuySell, the supply of businesses for sale is growing at a faster rate than the number of buyers entering the market.
One reason for the increase in sellers is that baby boomers, a huge chunk of the business-owner population, are reaching retirement age. Another reason is that business owners of all ages have been postponing the sale of their businesses since the economy collapsed in 2008.
The improved economy has encouraged these sellers-in-waiting to finally get their companies on the market.
It is a buyer’s market: the number of business being put on the market is going up and the prices they are selling for is going down.
A Realistic Game Plan For Success
If you like your business adventures to come with a healthy dose of highwire, white knuckle excitement, have at it. There are always businesses circling the drain that an owner would be happy to let you take over at a bargain-basement price.
But if you are like most first-time business owners, your new business is going to be your main source of income. You can’t take unnecessary risks.
And you don’t have to.
So here’s a better game plan:
Step 1: Make a realistic determination as to how much money you have available to invest.
Take at least 25% of that money and put it aside for both working capital and as a cushion. The remaining 75% is what you have available for a down payment on the business.
For example, if you have $200,000 to invest in a business that means you have about $150,000 for a down payment.
Step 2: Find the very best, smoothest running business you can find that can be bought for $150,000 down.
If the business meets your needs and can be bought outright for $150,000 all the better. But few small businesses are sold for cash, most have some level of seller financing. That is why I am talking in terms of a down payment.
Step 3: For the first 6 months you own the business do nothing.
I don’t mean literally do nothing. But do not make any drastic changes within the business. Spend the first 6 months as an owner learning all you can about the business, the industry and your local market.
If you buy a stable business there will be no need for drastic changes on day one. And if you stay within your budget there will be no need to take big risks hoping for a quick increase in profits.
There are few guarantees in life but I can guarantee you this: after running the business for 6 months your perspective will change.
The things you thought would be simple and easy will be anything but. Those promotional and operational changes that seemed obvious 6 months ago will now look much different.
And it will be at this point, after you’ve had some on-the-job training, that you will be in the perfect position to take this already good business, put your individual stamp on it, and make it truly great.
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Pat Jennings is the founder of TheBizseller.com, a site dedicated to helping owners sell their business by bringing them together with qualified buyers.
