Secrets To Buying Your First Business
By Linda Heuer
Have I told you the one about the guy who bought a Convenience Store as his first business and didn’t check to see if the Coolers or Air Conditioning worked before he signed the paperwork? Seriously, I’m here to tell you it happened, we have seen this and much worse. Buying your first business can be exciting, scary, overwhelming, and confusing all at the same time.
It begs the question: Just because you have the resources to purchase your first business, does this mean you should? The answer could go either way.
It’s easy to get caught up in the frustrations of your everyday work life. In fact, as you read this you will probably think to yourself, “Yep, I’ve said that!”.
“I want to be my own boss.”
“I want to own my own company.”
“I’m so tired of making tons of money for everyone else.”
“If they would just let me run this place.”
“I don’t want to be in sales, I’m just going to start my own business.”
I can’t tell you how many times we’ve heard these statements over the years. Rest assured, you’re not alone.
An extremely common theme among people who are analyzing their long-term career goals and are considering buying their first business, tend to want to shy away from sales. What they don’t understand is, almost everything you do has an interwoven aspect of sales in it. A manufacturer has to sell his product, a leader has to sell the employees on their untapped potential, a lawyer, the jury and so on.
Over the years, we’ve found the three main ingredients of successfully starting your first business are: Salesmanship, Skill and Attitude. Regardless of the situation, if you possess the ability to utilize these three attributes together with a strong drive to succeed, chances are you will come out on top.
For instance, Kevin Thole was a national award winning D2D Sales Manager tired of not being able to keep the majority of the profits for himself, when the opportunity of purchasing a ServPro franchise in the St Louis, Missouri area presented itself. Kevin knew nothing about home restoration from fires, flood, or natural disasters when he purchased the franchise. What was Kevin’s secret to success?
Kev, as his peers affectionately call him, attended “new owners” classes, maintained a student mentality and had the positive attitude he needed to learn all he could about the industry.
When Kev returned home, he quickly applied the newly learned skills and used his salesmanship to gain the new client base and employees he required to become successful. In Kev’s first year his franchise was awarded all of ServPro’s top first year business awards and within 2 years, Kev owned 3 more franchises.
He now has hundreds of people relying on the success of his business and is still breaking franchise records, 7 years later.
Unlike Kevin, when people are buying their first business, many just don’t think it through. They don’t have the friends and resources Kevin had by his side to reach out to. They look at it with those same romantic eyes and get swept up in that moment of blissful thought that no one will ever be able to tell them what to do, ever again. The allure of keeping all the profits speaks to people. Then, reality sets in and they realize there is more to buying their first business than they had initially considered, and they forget to check to see if the coolers work.
Before making the decision to jump into owning a business, it’s important to Pre-Plan so you understand what type of business fits your personality, meets your financial goals and aligns with what you really want out of life. Taking a little time to reflect on yourself and on what you want can save you hours of heartache and potential failure down the road.
Identify Your Goals
- How important is work life balance and what type of business will give you the balance you desire? Don’t be afraid to talk to business owners, in similar industries, to understand the workload, seasonality of the industry or any other hidden tidbits of information you may not be aware of.
- What hours or times of day are you willing to work? Whether you will be running the business yourself or hiring someone to run it for you, what hours you are willing to work matters. If employees go on vacation, call out sick, or exit the business, you may have to work their shifts. While short term coverage is usually considered doable, how would you handle long term financial hardships? Would you need to reduce headcount and work the shifts yourself?
- Does the business you are interested in purchasing fit your personality type? Understand that this is one of the primary attributing factors as to why many businesses fail. If you aren’t comfortable starting a conversation with people you don’t know or cold calling potential customers, you may want to consider purchasing your first business where people come to you. Some personality types typically like flexibility, others structure.
- If you aren’t sure, take a job in the industry you are thinking about entering, even if only for a few weeks. You can get a really good idea of what your likes and dislikes are in a pretty short amount of time. You’ll also learn a little bit about what works, and what doesn’t, so have your thinking cap on.
Understanding Your Financial Needs
- What is your credit score? A Credit Score of 680 or higher is generally needed for long term financing and can help you in numerous aspects of the business. You’d be surprised to see how much money a slightly better credit rating can save you on a loan. If it’s not where it needs to be, work to clean up your personal credit score before you try to get a loan. There are numerous ways to increase your score so if you are really thinking about becoming an entrepreneur, start now. This way you’ll be ready when the right opportunity presents itself.
- Develop a personal budget so you have insight into your current and future financial needs. How much money do you need to survive? Do you need to draw a salary? How much do you need to achieve your financial goals? Don’t forget to take your retirement aspirations into consideration.
- Do you have proper transportation for your business? How reliable is your transportation? When are major repairs like a roof, furnace, refrigeration, or flooring expected for you or your first business?
- Many businesses have seasonal ups and downs, that’s just part of the business world. But life happens, employees quit, bad publicity may occur, there can be a number of factors that can negatively impact your monthly business profitability. Do you have money set aside to cover both your personal and potential business expenses when things get tough?
Determining Your Path Forward
- Which type of business model fits you the best
- Sole proprietorship
- Corporation, S Corp, C Corp, Limited Liability Company (LLC)
- Tax Exempt
- Medical or Legal Corp
- Should you purchase an existing stand-alone business, a franchise or start your own business? There can be benefits and drawbacks to any of the options. Work to understand what they are and to identify your best path moving forward.
- Does the business exist online? If so, do you understand the basics of what is needed to maintain a company’s online presence.
- Do you need any training? If so, what do you need and how do you get it.
Being honest with yourself during the Self-Reflection and Pre-Planning phase is the key to determining your path forward, in defining your direction.
Now that you’ve decided you’re prepared to enter the world of business ownership, it’s time to start digging in.
Making A Smart Business Decision
Making the right decision about the company you buy increases your chances of long-term success. You’ll never be able to eliminate every barrier to success when buying your first business; the goal is to understand what the barriers are, so you can either plan for them or make the decision to walk away from the purchase opportunity.
“Only the paranoid survive.” -Andy Grove, former CEO of Intel states. Our recommendation…Be passionately paranoid.
Here are a few questions we would recommend starting with.
Why is the business for sale?
First and foremost, when your buying your first business, finding out why a business is up for sale is one of the most important questions you can ask. There is nothing wrong with being a bit skeptical and checking out the facts before jumping in with both feet. Don’t be afraid to ask questions. It’s going to be your business, there’s a potential that you’re going to own it. You may need to put your investigative hat on to discern between the reason you are told the business is for sale and the reason the business is really for sale. So, before you commit to anything…
- Why are they selling the business?
- What do they like about owning the business?
- If they had the opportunity to do a restart, what would they do differently?
Google The Business
- How old is the business?
- How many owners has it had?
- How long has it been under the current ownership?
- What are current ratings and reviews of the business?
Should I Get Pre-Qualified For A Loan?
Many business owners find value in securing more financing than the purchase price. There can be several reasons for this. One of the primary reasons is that the average time it takes for a new company to make a profit is two to three years. So, if you don’t have the finances readily available, you may need the additional money from the loan to help carry you until your first business is profitable.
- You could get busier than expected or land a large account and may not have the resources to purchase the items or equipment needed to fulfill the order.
- You may experience a jump in sales. With many companies, there is a lag between the sale and when you, as a business, are paid. You will want to have a plan in place to financially account for cash flow opportunities.
- Work with an accountant to determine how much extra working capital you should have set aside as an emergency fund prior to requesting your loan.
- Unforeseen expenses will happen, from things breaking to needing extra paper towels. Having an extra cushion available will help cover those expenses.
Why Should I Hire Professionals To Analyze The Opportunity?
A Business Lawyer, Accountant, Business Valuations Firm and a Consultant!
It’s critical to have each professional analyze their respective part of the business you are thinking about purchasing.
Cheyenne Weaver, owner of Veterinary Bookkeeper based in Topeka, KS states, “Be sure to hire a professional to complete an in-depth review of the company financial statements, rather than attempting to make sense of the finances yourself. If the company has not been keeping a good set of books, that is a major red flag.”
Weaver goes on to state, “Be sure that your accountant or bookkeeper thoroughly reviews bank statements, balance sheets, tax returns and profit rates spanning the past three years. Examining sales patterns will determine cyclical seasons of the company and whether sales have been steadily increasing over the years or if they have recently plateaued. Analyzing future cash flow and profitability reports can also help you decide if purchasing this company is a worthwhile investment.”
Weaver has a specialized niche and as an expert in her field, would be able to more efficiently identify gaps a general bookkeeper may overlook.
Regardless of the industry, the more eyes you have look at the business, the better off you will be. Working with professionals like Weaver helps you uncover every stone. When buying your first business and any business thereafter, you’ll want to do your due diligence, so you understand exactly what you may be getting into.
One of the most important points we want to make here, is that the individuals you hire should not be affiliated with the current owner. You are hiring them to protect YOUR interest, not the sellers.
If the individual has a relationship with the current owner, they may unknowingly suppress information that you consider critical to your decision-making process.
There are many items these professionals should be looking at. You’ll want to assure that you are conveying your minimum expectations, so you are both on the same page. It’s not uncommon for miscommunication to occur during this part of the process.
Here are just a few examples of what these business professionals should be taking a look at or performing for you:
- Does the business have any pending lawsuits, leans, outstanding loans, are they in collections, etc.? What are the accounts payable? Receivables?
- Are business licenses, leases & taxes current? Do they transfer?
- Has the seller or location run in or any legal trouble with the state, government, or IRS?
- Comprehensively review a minimum of 3 years gross revenue and profits, performing a deep dive on the books and provide you with a 3-year estimated projection based on current trends that can be utilized if pursuing a loan. They can also help you determine if buying the business or starting a new one would be a better move for you financially.
- Preparing a Letter of Intent (LOI) facilitates the start of a business deal, forming the basis of the potential transaction. You will want to assure that your attorney includes a contingency that the seller must be truthful, building in a provision that you may walk away at any time if not satisfied.
- They should help protect your interest during contract negotiations. Assuring such things as the seller promising to defend any lawsuits, pay any judgments and fees accrued prior to you taking ownership or that the audited list of assets is defined and accurate. They should also assure that both parties are speaking the same language regarding the business valuation and that the language is built into the contract.
Should I Buy The Assets Or The Business?
“Make sure you’re buying the assets, not the business. If the seller is a corporation or LLC, under no circumstances should you buy stock in his business. Instead, offer to buy the assets of the business, and form a separate company to act as the purchaser. Why? Two reasons. First, you get a better tax treatment, since your “tax basis” in the assets will be the amount you paid for them, rather than the amount your seller paid for them long, long ago. Second, if he owes money to people or is being sued by someone, you won’t assume any of those liabilities if you buy the assets,” states Cliff Ennico of Entrepreneur.
Ennico is spot on with his statement. You need to do everything you can to protect yourself.
You’ll want to verify that all parties are on the same page and that this part of the process is well documented.
Are you purchasing the Seller’s:
1) Assets such as equipment, account receivables, lead lists
2) Just the business name/location
3) The business in its entirety
How Long Will It Take To Turn A Profit?
Understanding the company’s potential profitability is important. If you purchase the business, it helps set the tone for how quickly you can grow, what type of marketing activities you can utilize and lets you know how quickly you should initiate contingency plans.
Work with your accountant to calculate your Overhead and develop your profitability timeline. You’ll want to analyze your Yearly, Monthly, Weekly and Pre-Paid Expenses as part of the analysis.
Here are a few of the additional items you will want to track.
- Merchant Services and supplies
- Website hosting and associated cost (Existing or New, a website is crucial in todays market)
- Advertising cost
- Internet and phone service (Can you keep the current number?)
- General utilities
- Equipment Contracts
- Servicing Contracts
- Insurances (Various)
- Initial set up cost with purchasing and taking ownership of various aspects of the business
- Will any of the above transfer or will you need new services and deposits?
Simon Rimmington, owner of Radical Webs Inc, based out of Fort Lauderdale, Florida states, “In working with new business owners, I find that many new owners underestimate the power of their online presence to attracting new clientele. Having a well-designed website that operates efficiently is vital to creating a great first impression.”
“Whether you have an informational website or an e-commerce store, they have the ability to help improve sales, which ultimately improves your bottom line. I cannot overstate how important your company website is,” says Rimmington.
Rimmington makes a good point about good first impressions … details matter. People are busy, really busy. While on the go, they use mobile devices to research companies. Think about that for a moment. Is the website mobile friendly? Is it easy to read on the go? How long does it take to download? Every second matters, with each extra second of download time, potential clientele could exit the website before seeing your new page.
There are so many aspects of the business that can affect the bottom line.
Everything from first impressions to marketing strategies should be looked at. So, once you’ve decided to purchase the business, you’ll want to start digging in to the details.
Identify best practices, analyze opportunities and use the information to help define your marketing, growth and transition strategies.
It’s important to get your ideas on paper. Not every idea is a good idea, so get them documented and then let them marinate. You’ll be surprised at how your ideas and strategies will change over time.
Here are a few ideas to get your mind moving in the right direction.
- What will your transition strategy look like?
- Should you ask the Seller to perform a warm hand-off to all Key Employees, Suppliers and Major Clients? Should you establish a communication schedule so the seller announces the sale just before you send an introductory email?
- What will the company announcement look like? How will potential employees interpret the message?
- Does your growth strategy align with the fixed conditions of the current location?
- Is there ample parking to sustain the type of growth you wish to achieve?
- Is the current square footage enough for you to achieve your vision?
- Does the location have rules that limit your hours of operation or what you can sell? Some cities and/or mall locations may have strict guidelines which must be followed.
- Who are your nearby competitors?
- How relevant is this business and will you be able to adapt this business with the market?
- Is the market over saturated? If so, how do you get more eyes on your product?
- Marketing Strategy
- How well established is the business on social media?
- How will you overcome bad reviews?
- What does the web page look like? Is it mobile friendly? How quickly does it download?
- What are the first impressions of the business? Is Google Maps accurate?
- What recruiting base is the most effective in the market? This can vary by city and industry, just because something works for a friend’s business, doesn’t mean it’s the best option for you.
- What sets you apart from the competition?
- What should your sales strategy look like?
- Do you have the right people in place?
- Organizational Strategy
- How will you organize the business paperwork, files, etc.?
- Is there a software option that can help you get organized or reduce business expenses?
Remember, when buying your first business, plan what you want to do and how you are going to get there.
Your plan should include realistic goals for both the first few months and the next few years.
Buying your first business and becoming an entrepreneur should be fun. Plan on developing a good strategic partnership with reliable sources whether it be your suppliers or the type of campaign you choose to sell.
Know before embarking upon your new venture, what is it that is going to set you apart from the vast amount of competition that is out there for each and every product and service that you offer. Andrea Burkholder, managing partner at Oomph Consulting Group states, “Great customer service is one of the cheapest things you can provide to your customer base and is one the most memorable aspects of a business. Many people are willing to pay more when a great customer service experience is coupled with consistency.”
Keep in mind, being competitive doesn’t necessarily mean cheaper. Absolutely it could mean your product costs less, but it could also mean you have better service, better-quality or a more comprehensive offer. The beauty of buying your first business is that you get to design your process.
The list above is only a partial list of items you should take into consideration before committing to buying your first business. We wish an article such as this could guarantee success, but we don’t know you, your business acumen or your work ethic. Hiring the right professionals significantly improves your chances for success, but when they are gone, and no one is looking, you will ultimately decide if your first business becomes the success you have always dreamed of or a failure to learn and grow from.
We believe we are the best in the world at what we do…..we help others achieve their dreams. Oomph Consulting Group has the experience and proven track record to keep you on track to achieve you dreams.
Like this article? Click here to see our article on having a warrior mentality
Contact us or read more about Oomph Consulting Group here.