Buying a Small Business in the Current Economy

Due to the current economic conditions, many people will face tough challenges in regards to investment decisions in the years ahead.  A large number of people have lost most of their investments in real estate, stocks, bonds, or even their job in the past few years. Purchasing a small business can present an opportunity to begin to regain your losses and get back on track financially. This investment typically provides both a high rate of return and control, and can provide better returns than the majority of other investments.

The expected rate of return on an investment directly correlates to the perceived level of risk. Business ownership ordinarily presents the highest perceived risk, and therefore the maximum yield of returns. Small businesses usually give rates of return from 20% to 50% - up to five times as much as other common investments. This provides you the prospect of regaining your losses far faster, as well as leaving you with an investment that will continue to perform well in the future.

In order to successfully deal with this increased level of risk, it is important to purchase a business that complements your skills and past experience. Do not be tempted by businesses that promise a high rate return, but that you have no experience in. It is advisable to purchase an underperforming business which you can grow and improve rather than an opportunity in which you have no background. A good business advisor or broker can assist you in managing this risk.

Owning a small business gives you the ability to control your own investment. You personally manage decisions which determine how the business performs, both now and in the future. Due to the current economic situation, many businesses are selling below market value and sellers are more inclined to provide financing.  You may also be eligible for a small business loan through your local bank or a SBA government program.

Ultimately, this is an ideal time to pursue your dreams of small business ownership in order to help secure your financial future. With careful planning and risk management, the returns and rewards can be well worth it.

Selling A Distressed Business

Surprisingly, selling a distressed business can be profitable and relatively straight-forward. There are individual buyers and firms that specialize in purchasing such businesses; these buyers tend to be opportunistic bargain hunters and are adept at getting more for their money. Therefore, there are some strategies that you should utilize in order to maximize profit from the sale of your distressed business.

First of all, you may want to enlist the help of a business broker who specializes in distressed sales as they may be able to sell your business quicker, more effectively and help broker a better deal for you. Whether you decide to use a broker or sell your business independently, it is imperative that you prepare your financial statements and identify potential buyers.

You must develop a realistic understanding of the value of your business, in order to sell it in the most profitable format – either as a whole, piecemeal or by liquidating part of it. Search for ways to reduce risk to the buyer, and emphasize the value of the business’s assets. Never underestimate the value of your customer base, as this is often the most significant asset of a business. Also focus on the worth of your inventory, intellectual property and FF&E. Review the areas of the business that require improvement and perform a cost–benefit analysis. If fixing an area of concern leads to a rapid raise in value that outweighs the cost of repair, you should certainly do it.

Finally, have a strategic plan in place in regards to the actual sale of your distressed business. It is often advisable to have a ‘time is money’ approach to the sale, as time spent waiting for a higher offer can ultimately lose you money. Nevertheless, always first examine the benefits and risks of taking a quick, lower offer over waiting to reach your anticipated selling price. You should also have a back-up plan in the event that your business does not sell – continue to manage the business, liquidate or declare bankruptcy.

Tips for Buying a Profitable Business

Purchasing an existing profitable business can certainly be a wise investment, especially in contrast to starting a business from scratch.  There are a number of snares in the process that can easily be avoided.  It will serve you well to start off by considering hiring a professional to assist in buying a business.  Business brokers are worth their weight in gold when making such a sizable purchase.  These folks can help guide you through the proper methods of Due Diligence, critical in this kind of business transaction.

There are three important areas to consider when looking at buying a business.  First is reviewing the company’s income.  Since the business is looking to sell, it will most likely have polished up all records to show it in the best light possible.  Asking good questions and knowing what to look for will help to reveal hidden costs.  If there is equipment, make sure it has been regularly maintained to avoid significant cost as soon as the company becomes yours.  Next remember that, essentially, you are looking to purchase an income stream, not isolated spurts.  That means that you should look for irregular income items in the records, such as sale of machinery.  Then keep in mind that a business in new hands often has higher initial costs until the new owner establishes a rhythm; never assume that you can run the business more efficiently when considering income.  Also, never underestimate the income tax impact cutting into profits.  Especially if among the company’s assets there is a lot of equipment or property, you need to beware, since such things are generally re-appraised for tax purposes upon a sale.

The second area is staff.  Many businesses, especially small ones, pivot around the owner as the key employee.  Without the key employee the impact may be unknown.  Evaluate as carefully as possible.  As far as other employees are concerned, you’ll want to consider such things as whether they are under contracts, if there is a raise schedule, if they have been with the company for long, and if they plan to stay given a transition of ownership.

The final area is negotiating the price you will pay.  Never pay for potential.  Although it may be listed out and may be nice to consider, make sure you aren’t paying for something that has not yet happened.  Along these lines, identify what the primary force driving income is.  Sometimes it is the current owner.  Make sure whatever it is, it is something you will be able to successfully replicate.  If you are presented with income projections, pay more attention to the assumptions made in generating those figures than the figures themselves.  Again, wanting the business for sale to shine, the seller or broker may be showing you figures based more on optimistic assumptions than realistic ones.