Anyone who has built a business knows just how long it can take to get a solid infrastructure, team, equipment, sales and so on to make it profitable. It could take years. One solution is to buy an existing business and grow it.
We spoke to serial entrepreneur and investor, Thaddaeus Koroma of Limit Breakers, who has been buying businesses and encouraging clients to buy businesses for more than a decade.
Koroma’s company is what you call a ‘business accelerator’– their business is about leveraging the public profile of celebrity clientele around the world to create new revenue streams. Identifying, buying and transforming existing businesses is one of Koroma’s passions and he shared some tips that he says everyone should know when they are considering buying a business.
“Often people are afraid to buy an existing business because they don’t want to bite off more than they can chew. There are ways to protect yourself and mitigate risk,” Koroma says.
5 Tips on How to Buy a Business
1. Always go with what you know.
Taking on a company that you already know how to run and have a proven track record of success makes this a more likely win from the outset. If you own a winery, perhaps you look to buy another winery. Or, buy a wine distributorship after years of working with several and understanding what it takes.
You are starting with years and years of know-how before you take on something new. One of the best things you can do is buy a competitor’s business. You not only know the business, but you know the market, the questions to ask and how it works.
Another bonus: lenders are more likely to lend to the buyer because they too have more confidence you will be profitable and able to repay them.
2. Buy a struggling business and pay the seller when you make money.
Often a seller is motivated to sell their business because they made a couple bad moves, stopped turning a profit or, worse, they are in debt. They are burnt out and they don’t see a way out. If you see a way to get the business back on its feet, this could be a win-win.
Pay the seller a small amount of money so they know you are committed, make sure that you are not responsible for the business debt and make an agreement to pay it incrementally off when you start making money, then make an agreement to share the profit once it’s sustainable.
This is crucial. If you see a way out and are willing to pay up front, what’s to stop the seller from making the business look better than it actually is. A seller is more likely to give you accurate information, disclose problems and help in any way they can to support your success. Their fate is now tied to yours.
3. If it looks too good to be true… It is. Do your due diligence.
When my aunt first moved to New Jersey, I was a young man. She bought a laundromat called The Soap Opera (yes, that is what it was called)–the couple who sold it wanted to retire and travel. It looked like a no-brainer— the books showed a healthy profit and it made sense that they couldn’t travel while being tied to the day-to-day.
My aunt knew nothing about laundromats, but how hard could it be? “You will not believe how much money I am about to make”, she told our family “how lucky we are that they are selling it.” Turns out that the books they showed did not match the bank deposits. They had lied, it was losing money—and the land it sat on was being leased for four (4) times the going rate in the market.
If my aunt had known the laundromat business, or had gone to the laundromat everyday when she was considering buying it, spoke to employees, spoke to customers, she would have seen how empty it was. People in the suburbs have little need for laundromats— she would learn later that it’s mostly people whose washers break at home and they need it temporarily or the homeless.
If she had investigated, studied the business, hired an accountant, she would have seen the signs and walked away. I was shocked, just as she was, to learn that someone would lie and do that to someone. I learned a valuable lesson and think of her often when I hear about entrepreneurs buying a business. Investigate. Don’t trust what you can’t see.
4. Always use an easy out clause.
Buy a business and write the contract so that in one year you can revert ownership to the original owner in a certain timeframe (before the end of the first year is common). You may lose some money and time, but you will know very quickly if you can make it work. Just like paying the seller of a struggling company if you make money, their fate is tied to your success. In essence, they are on the hook more than you are because you can cut and run.
5. Elevator Pitch.
I like to talk to strangers and tell them about a new business venture to see how it sounds. Screenwriters do this. If they can’t share the idea for their movie in a few sentences, and make it compelling, then it’s back to the drawing board. One of the most underrated tools in life is community. Is the idea easy to follow and seems like a good idea to anyone?
Here are two examples–which sounds like a better opportunity?
(1) I’ve owned three successful dry cleaners in Denver for ten years. I am going to buy another dry cleaner in town with a good reputation because the owners are getting a divorce. They are currently making a healthy profit and, with a fourth store, I will cut my existing costs by 10% because I will buy larger quantities. More good news is that construction is booming and new people and businesses are moving to Denver more than ever —which means more people need dry cleaning.
(2) I am buying a restaurant that currently is successful from an owner who wants to relocate to raise his kids closer to his family out-of-state. I have to take equity out of my house, I have owned a restaurant before but not like this. I think I can do it.
Which sounds better? Number 1, of course. Now, imagine you tell ten strangers these ideas. Common sense always prevails. The thing that surprises me every time is how much I end up learning. Often people I chat up at a party have owned similar businesses and share rich knowledge from personal experience, ask helpful questions and point out pitfalls. This process has helped guide me immensely.
As Thaddaeus points out,
buying a business should be a natural extension of what you are doing now. Go with what you know, don’t gamble, and take a calculated risk.