So you want to be your own boss. Consider the options – work as an independent contractor…start your own business…buy an existing company.
Certainly there are pros and cons to each option. If you do a careful analysis, you’ll learn what many seasoned entrepreneurs have discovered…the risk-to-reward ratio is tipped in your favor when you purchase an existing business.
Admittedly, as an independent contractor, your risk is minimal. The upfront investment and overhead costs are limited. However, without the ability to leverage the work of an employee base, the returns are limited by your own personal capacity.
Starting a business of your own can pay great dividends, but it’s important to understand that the risks are significant. Most start-up businesses will falter and eventually die. According to Michael Gerber, author of The E-Myth Revisited, 40 percent of new businesses fail in the first year and 80 percent fail within five years. On the other hand, purchasing an existing business reduces an entrepreneur’s risk while creating opportunities for tremendous profit.
There are a number of reasons to consider the purchase of an existing business rather than starting one:
Becoming your own boss always involves a risk. When you buy a business, you take a calculated risk that eliminates a lot of the pitfalls and potential for failure that come with a start-up.
Buying a business is a process that takes time. It can sometimes take years to find the right opportunity.
Unfortunately, many buyers want to look at all available options, thinking they’ll recognize what they’re looking for when they see it. That approach is actually a waste valuable time and energy and can lead to frustration and an end to the search. Or the potential buyer may miss out on great opportunities because they weren’t found early enough or they weren’t ready to move forward with a purchase.
There are some key steps to follow in the business search process:
Start with a self assessment:
Ask yourself why you want to buy a business. What types of work activities do you like and what kind of lifestyle do you want to pursue? It’s important to understand that there may be more work and longer hours for an owner in some industries. Be sure to include your family in the assessment.
Establish financial expectations:
Determine how much money you need and want to earn. Make sure your expectations are in line with the types of businesses you are targeting and the return they can produce.
Put together a personal financial statement:
Outline your assets and liabilities. Identify what you can use for your initial investment. The personal financial statement serves as proof of your financial wherewithal, so be prepared to share this document with a seller’s intermediary.
Update your resume:
Sellers want to be sure that their business will continue to be a success. They’re looking for someone with the experience necessary to continue their legacy and take care of the staff. Ultimately, you’re selling yourself to the current owner(s), the lender and the professionals representing them.
Outline your acquisition criteria:
Define the parameters of your search. Ideally it should include your targeted industries, geographic area and transaction size. Your acquisition criteria will help you demonstrate your commitment to finding the right business for you.
Search multiple sources and enlist help:
Let your professional advisors (e.g. attorney, accountant, financial planner) know you are looking for a business. Most importantly, contact business intermediaries who represent businesses within your targeted market. They will notify you of available companies that meet your criteria and qualifications.
Most business brokers or intermediaries work for the seller and are paid by the seller. That means you can enjoy the luxury of their services at no cost. The intermediary is looking out for the seller’s best interests, so you should have experienced council to represent you in any transaction.
When interested in a business, you want the business intermediary to be selling you to the seller. Prove to them that you are a qualified, motivated buyer by preparing for your search.
Your motivation, lifestyle, expectations, financial statement and résumé will help you develop your acquisition criteria. Identifying and communicating your acquisition criteria, qualifications and experience will save time and frustration and will place you far ahead of less focused buyers.
Merriam-Webster Dictionary defines due diligence as “research and analysis of a company or organization done in preparation for a business transaction.” Some even look at it as a pre-marital background check and counseling. But it should be noted that dissolving a merger is much more difficult than ending a marriage if things aren’t as they appear.
Ultimately, due diligence is the process of being sure that things are as they appear before a deal is sealed. For someone considering a merger or the purchase of an existing business, the review of documentation and the answers to your due diligence questions are critical. There’s no doubt it is a complex process that can be time-consuming. But with so much on the line with any merger or acquisition, you don’t want to make a decision without all of the information. You want to be sure everything is reviewed and all questions are answered to your satisfaction.
During the due diligence process, an often lengthy list of documents should be provided. The list of documents should cover a range of areas, including:
Today more than ever, buyers are putting more emphasis on the due diligence process. And while the financial aspect is a key component, the due diligence process should also consider organizational items. Be sure to seek documentation and ask important questions about the company’s culture, strategy, leadership and competencies.
To properly address and evaluate all of the areas of the due diligence process, you want to assemble the best possible team of people. Work with that team, including your business intermediary, throughout the process to review and evaluate the documents and information you receive. It’s also important to keep an open mind. Be sure that you get all of the information you need, but don’t assume that you will find something wrong.
Although the due diligence process may take considerable time, it’s a critical part of any transaction and should be considered the foundation of the entire deal.