Buying your first company can be an exhilarating—and sometimes terrifying—experience. When done correctly, acquiring an established business can increase your revenue and open the door to larger and more profitable takeovers down the road. If done incorrectly, the results can be devastating to your current business, your bank account and your future opportunities. That's why it can't be stressed enough that you need to really take your time and do the research before you buy your first company.
So with all the potential risk, you may be thinking to yourself, why even bother? I've successfully started my own business before, so why not just invest my time and money into another startup? While I'm not necessarily saying you should take over an established business instead of starting your own, there are certainly benefits from doing so.
The main benefit to buying a business over starting from scratch is how quickly you can start seeing ROI. If you do your research and find a company with an established customer base, half the battle of a normal startup has already been fought. Clientele aside, the other main benefit of purchasing a business can be the key staff and tested operational procedures that will already be in place. Experienced staff who know the business inside and out can be a major asset to the company transition. Likewise, it's often much easier to correct the daily procedures that don't work than it is to completely start from scratch.
When I bought my first company, things went remarkably well thanks to hard work, due diligence and a little luck. However, I made my fair share of mistakes along the way and wasted countless hours that could have been put to better use.
With that in mind, here is a step-by-step walkthrough of what the process can look like, along with highlights of some best practices to follow and pitfalls to avoid.
Step one is tracking down companies that are currently for sale or those whose owners have been talking about leaving the business. I suggest starting by looking for online business brokers and other websites that list companies for sale. This is an easy step, and it's something you can do at any time. Ask around online and post on your social media to see if any of your business contacts can recommend brokers they've used. Also, try contacting your local business associates to see if any of them know of a company that might be what you're looking for.
As luck would have it, my friend found the business that I went with. To get the best search results, you should utilize every available tool both online and in person. Once you've found a suitable company, I suggest finding a good broker. The qualities you'll look for in a broker will vary, but the deal-breakers don't change.
Your broker should have a complete understanding of the business valuation and transfer process. If they struggle to answer questions or seem unprepared, that's a red flag. Any broker who requires a large portion of his or her fee up front, I'd recommend turning down. It's common for a small fee to be charged up-front, but the commission comes when the sale is complete. Most importantly, trust your gut instinct. Your broker is your main ally in this process, so it's important you feel comfortable with him or her.
When inquiring about a potential business, the reason for the company's sale should be the first thing on your list. An entrepreneur who's trying to part ways with an unsuccessful business may not reveal all of their reasons for selling, so don't rely solely on the seller's answer. The second factor is company culture. Both clientele and key staff choose a company because it matches their business philosophy. Be sure your methodology is compatible with the current customers and staff or you'll be starting from scratch.
Once you've decided the company is right for you, it's on to the negotiations. If you're a talented negotiator, this step will be easy. For the rest of us, here's where your experienced broker will pay off most. Explaining the ins and outs of proper negotiation tactics could fill an entire article, so to keep it simple, do your research or hire a professional.
Once the negotiations are complete, it's time to complete a paperwork marathon. To ensure this task goes smoothly, I recommend a broker, a lawyer and an outsourced CFO. For those of us who lean on the disorganized side of life, a personal assistant can be a real lifesaver as well. Upon reaching the end of your paperwork marathon, you'll need to do a paperwork sprint while you sign the necessary documents to acquire a business loan and enter escrow.
The bank you get your loan from is a matter of personal preference. Just do your due diligence and make sure you know all of the options. As for escrow, some people may tell you it's unnecessary, but this is where you'll double-check and completely ensure that you won't be inheriting hidden debt or capital with liens against it. Once you have the loan and escrow clears, you've essentially crossed the finish line.
The financing details of any particular deal will vary too greatly for me to get into numbers, but there are a couple of helpful things to know. As a rule of thumb, the purchase price of a company is generally about half of its yearly revenue. Also, it's not uncommon for part of the financing in these types of deals to come from seller carry-back. Essentially, seller carry-back is just seller-provided financing. The seller takes payments on a portion of the sale price for a set term and in return, they usually receive a higher purchasing price.
As soon as the transfer was completed for the company I purchased, I sold unnecessary assets, which included outdated printing equipment and company vehicles. That helped recoup some of my initial investment. Next, the staff was remodeled and the company's headquarters moved to a more efficient location. If the business you choose is already profitable and you correct the real issues instead of fixing what isn't broken, your new business could start paying itself off that first year.
Taking over an established business will feel very different than your first startup, but with due diligence and hopefully a little luck, it will be well worth it. One of the main reasons for experienced entrepreneurs to purchase an established business instead of starting from scratch is the time you will save. Don't get me wrong, taking over a business smoothly and profitably requires a lot of work. However, it just doesn't (usually) require the same 24/7 attention that a brand-new startup does.
Brandon Stapper is founder and CEO of 858 Graphics. He is also a member of the Entrepreneurs’ Organization (EO), the global, peer-to-peer network for entrepreneurs with more than 11,000 members in 157 chapters and 48 countries.