When entrepreneurs talk about starting a business, they often think of building a company from scratch, but there's another way of working for yourself.
Buying an established business can be a quicker way to hit the ground running.
BizBuySell.com, a business-for-sale marketplace, reported a record number of small businesses changing hands in the first half of 2018. There were 5,383 businesses sold, putting the year on pace to surpass 2017's record-high 9,919 transactions.
Why so many? One reason is they are so affordable.
According to FitsSmallBusiness.com, even if you have less than $250,000 to invest, there are plenty of options, ranging from $80,000 for a salon to $240,000 for an auto repair shop.
As you think about a location, keep in mind that North Carolina was ranked as the #1 Best State for Business in 2017 by Forbes magazine.
Before you plunk down the cash to acquire a company, here are five pieces of expert advice on buying a business in North Carolina:
Several brokers based in North Carolina all offered the same four words of advice.
“Do your due diligence,” said Peter Garrod, owner/broker of WNC Business Brokerage in western North Carolina. “That’s the most important thing. Once you find your business, do your financial due diligence, historical financial due diligence and due diligence about the type of business you are going into.
“Ensure that what you’re going to be purchasing has got a good past and good potential for the future. Beyond the historical, look at the staff. Are they employed properly?”
According to FindLaw.com, a legal topics website, a due diligence checklist for purchasing an existing business should include:
• organization and good standing
• financial information
• physical assets
• real estate
• intellectual property
• employees and employee benefits
• license and permits
• environmental issues
• material contracts
• product or service lines
• customer information
• insurance coverage
• articles and publicity
Garrod wants to help clients make a smooth transition.
“I don’t try to sell a business and then say, ‘Come and get all your stuff,’” Garrod said.
Jack Sluiter, business broker for Transworld Business Advisors of Charlotte, echoed Garrod’s initial response.
“Do your due diligence,” Sluiter said. “Most transactions that we are involved in, the buyer is not represented by someone who does their due diligence.
“Our professional brokers do the due diligence for you.”
When potential business owners consider acquiring a company, they should be selective throughout the process.
“Choose good advisors for due diligence,” said Neal Isaacs, business broker/owner of VR Business Brokers in Raleigh.
And just because you get numbers, don’t assume they are the correct numbers.
Some buyers make that mistake.
“They trust the seller’s representations for the earnings of the business, and they don’t validate that,” Isaacs said. “An accountant or an attorney can help the buyer with what to ask for – tax returns, profit-and-loss statements – to verify what the seller is saying is true or if they are just making up numbers.”
You might feel excited about buying a business and want to hurry up and get it done, no matter the cost.
You might have sentimental reasons for purchasing a property. Perhaps you have fond memories about a similar business from your childhood, not taking into consideration why it might have failed.
Snap out of it.
Or your business could be in trouble in a snap.
“Business is not about emotion,” Garrod said. “Some people get emotionally involved. They get desperate, rather than standing back, looking at their options and making logical decisions about what they are going to do.”
When you get the numbers, make sure they add up.
Qualifying for the loan to buy the land and assets is not enough.
“It all comes down to cash flow and being able to prove what the business is earning,” said Erik Sullivan, marketing director at MidStreet Mergers & Acquisitions. “Buyers will need to be able to pay the debt service on the loan [if they finance the purchase] and still be able to pay themselves a salary.”
One of the biggest mistakes business buyers make is biting off more than they can chew.
And not just with the money.
“They buy businesses they are under-qualified to operate,” Sluiter said.
Ask yourself: Can you handle the day-to-day operations? Do you know what you are getting into?
“They really need to look at it and make sure they have some sort of skill set,” Garrod said.
“People might go into it thinking that running a business is easy, but you’ve really got to put the time and effort in.”
There are reasons the seller enjoyed owning the business.
Listen and take notes, yet take them with a grain of salt. After all, the owner is trying to sell you something and painting the picture in the best light.
If you're lucky, the seller will share insights into the difficulties of owning the business.
“For an OBX company, make sure you understand how the seasonality of our market affects the profitability of the business,” Sullivan said. “Expenses such as rent continue year-round while revenue is only generated six months or less out of the year.
“For new buyers, make sure you save as much as you can in the first season of ownership and measure how your expenses will stack up over a full year.”
Learn all you are able while you are able. Don’t expect to be able to call up the previous owner months down the road.
“You tip a bucket of water out, you want to catch all of it,” Garrod said. “During the training period, you want to learn everything you can. Once the seller’s gone, they’re gone.”
Once new business owners take the wheel, sometime they want to reinvent the wheel.
Not so fast.
“I try to find out the background of people and just help them,” Garrod said. “You can buy a business and complicate it. Or you can keep it simple, learn it and then complicate it.
“Run a business for six months and then put in changes.”
Buying a business is not a shortcut. There are pros and cons. Get plenty of advice and do your homework.