Have you ever thought of buying a business but you don’t know how to go about it? Do you want to learn how to buy an existing business with no money down? If yes, then i advice you read on.
Acquisition is the new strategy on board. Many successful entrepreneurs have expanded or gone into business using the acquisition model and the upcoming entrepreneurs are now following the same path. Most entrepreneurs now would rather resort to buying an already established small business than building one from scratch.
“I was vehemently against acquisitions. Now let’s buy everything in sight. Well, that’s a slight exaggeration. We are a little more strategic than that. But everything was on sale.” – Larry Ellison
Many business titans and corporate managers are now including acquisitions as part of their company’s growth and expansion strategy because acquisition is an effective way to enter a new market terrain without starting from scratch.
Now why do people buy businesses?
I don’t think I have a definite answer to this question but I will reveal the most possible answers why an entrepreneur will prefer to buy a business. Early 2010, the news was filled with stories of how Larry Ellison led Oracle to strategically acquire 57 companies within five years. Is Larry Ellison the only entrepreneur who believes in strategic acquisitions? The answer is no. General Electric has been strategically positioned to grow via acquisition.
Entrepreneurs see buying ready-made business as a way to minimize risk and reduce their rate of failure, so franchising became the new hot business on the block. Below are 12 possible reasons why entrepreneurs buy businesses.
12 Reasons Why Entrepreneurs / Investors Buy Businesses
- To Avoid the Risk Involved With Building a Business from scratch-: Successful entrepreneurs who built great businesses from scratch definitely know the pain and sacrifice it took to achieve the feat. Most entrepreneurs shy away from the challenges of building a business from scratch and I bet you, it is not something you want to get involved with. Entrepreneurs who don’t want to go through the process of building a business from scratch usually opt to buy an already made business.
- To Increase Profit-: If you already have an existing business, or an investment portfolio; you may decide to buy a business to increase the cash flowing into your portfolio.
- To Fulfill A Desire To Grow-: If you feel there is a need to grow, buying a small business may be an option.
- For Diversification Purposes-: Buying a small business is another sure way of taking advantage of an opportunity in an industry entirely different from the one you are currently operating in.
- To Have a Value Driven Acquisition Strategy-: Some companies adopt the acquisition strategy as their overall value driven plan. This is in a bid to increase the value of the company’s value or worth.
- To Buy up Competitors-: Sometimes in business, threats are eliminated by strategic acquisition. A company that poses a potential threat can be bought out to eliminate the threat.
- To Utilize Excess Capital-: When company is flushed with excessive cash or capital, buying up a small business might be the next option instead of building one from scratch.
- To Gain New Distribution Channels-: A business can be bought to increase and improve the buyer’s distribution channels so that products can reach customers in less time.
- To Gain New Management-: An interesting way to bring a strong management team on board is by buying up the company where the managers are employed.
- To Increase Shareholders Confidence-: Acquisitions increases shareholders confidence because it shows the internal strength of the entire business.
- To Strengthen the Company’s Balance Sheet-: Just imagine Oracle Corporation buying up 57 companies within a space of five years. Buying businesses strengthens a company’s balance sheet; it shows investors that the company has a strong growth plan and potential.
- To Gain Access to New or Emerging Technologies-: In the business world, it has been noted that 75% of upcoming technological innovations are brought in by small businesses. So acquiring such businesses puts you in control of their innovative technologies. For instance: Google Inc acquired YouTube and FeedBurner. Yahoo acquired Viacom, MyBlogLog and Tumblr. AOL Time Warner acquired TechCrunch. Oracle acquired Sun Microsystems. Facebook acquired Whatsapp and Instagram
Does buying a small business catch your fancy? Do you have access to funds and you have your eyes on some small businesses in your vicinity? Then sit back as i unleash some intelligent steps to follow to avoid getting your fingers burnt.
What Does it Take to Buy a Business With Seller Financing
Seller financing, also called owner financing, is the financing that a business owner or seller provides to you to purchase his business. It is generally done in two ways. Firstly, the seller can accept a promissory note from you for a portion of the sales price. Alternatively, you can make a down payment while the owner serves as the lender for the remainder of the purchase price. In this case, the seller accepts both a promissory note and a lien on the business’s assets in exchange for the purchase price.
It is now very common for entrepreneurs to include seller financing as part of the deal structure when they are looking to buy a new business. From your perspective as a buyer, seller financing can help you accomplish several goals.
First of all, as a buyer you face the risk that the success of the business hinges majorly on the seller’s input, which means the seller is inseparable from the business. But by having the seller finance a fraction of the purchase price, you will be more confident in the fact that the seller believes that the business can thrive without him.
In addition, seller financing will help you benefit from the seller’s experience for a much longer period. Since the seller knows that his chances of getting back his money depend on the success of the business (and, of course, he wants back his money), he will be motivated to contribute immensely to the business from his experience. Now, that you have understood some of the benefits of buying a business with seller financing, you need to know the steps involved.
How to Buy a Business With No Money Down (Seller Financing)
“Everyone thought the acquisition strategy was extremely risky because no one had ever done it successfully. In other words, it was innovative.” – Larry Ellison
1. Prepare yourself to go through the acquisition process
Before you think of buying a small business, let me warn you ahead of time that the process associated with acquisitions; which is similar to the entrepreneurial process can be very stressful. It takes a lot of calculations, strategizing, commitment and discipline to successfully buy a business. Be it a small business or a big one.
“If you cannot negotiate, you will end up getting good deals at exorbitant prices or worse still, you will get nothing.” – Ajaero Tony Martins
The first advisable step to buying a small business is to assemble your own strategic team. This team should not necessarily be those at the helm of affairs of your business. The process of buying a business is quite tedious, so it’s advisable you leave out some members of your business team. They will see to the smooth continuous running of your existing business (if any).
The team you are about to assemble should be charged with the responsibility of bringing your acquisition plan into reality. As an entrepreneur, it’s your responsibility to assemble an excellent internal working team, as well as an external team of advisors.
Your internal team will be made up of representatives from your finance, marketing, strategic planning and operations department. The internal team members should be creative and aggressive. They should focus on the core fundamentals that drive the acquisition strategy such as distribution, integration and expansion of the customer base.
As for your external acquisition team; it’s going to include experienced external advisors such as attorneys, accountants, investment bankers, valuation experts, business sale broker, insurance experts and employee benefit experts. Most importantly, your external team should include your business coach or mentor, who should also be well experienced in the acquisition game.
After assembling a strategic business team, the next step to take is to carry out a feasibility study on the proposed businesses of your choice. Please note that your team should also be involved in this process. A rule of thumb in the acquisition process is this: do not select a company and hope you can acquire it for nothing; it’s the same as saying “don’t carry all your eggs in one basket.
If it’s your goal to buy a company, then you have to select at least five businesses based on certain strict determined factors and begin work on them. Only this way will you be able to buy a business at an excellent price.
4. Work out a compensation plan for your external advisory team
As the entrepreneur leading the entire acquisition team, it is your duty to plot a compensation plan for your external team. You can work out the compensation modalities with your internal team. Compensations for external advisors are usually based on an agreed percentage of the total price of the business acquired.
5. Develop a strong acquisition plan
“It is better to buy a wonderful company at a fair price than to buy a fair company at a wonderful price.” – Warren Buffett
This is where all the acquisition strategies and plan is plotted. Different industries require different approach and strategy. This is the point where the following questions needs to be answered:
- Is your team considering a hostile takeover?
- What is going to be the long term impact of the acquisition on your company?
- How does your team intend to finance the acquisition?
- Have you developed a contingency plan just in case things go the other way?
These are few of the questions you are suppose to answer in the process of developing your acquisition plan.
6. Make your offers known to the proposed sellers
Before making an offer to the proposed sellers, make sure the above five steps have been thoroughly settled. If you recall, i said earlier that if you intend buying a company, you should pick at least five businesses of your interest and this is my reason for making such statement.
When you send out acquisition proposal to the company you intend buying, there is every possibility that your proposal will be thrown back at you. This is always expected except the company to be acquired is already on sale. When making your offer known to the seller, make sure you do so professionally and if eventually a meeting is scheduled between you and the proposed seller, make sure you know your objectives before entering the meeting venue.
If you are not a good negotiator, then let a capable member of your team do the talking while you observe the prevailing atmosphere logically.
To Buy a Business With Seller Financing
- Agree on the purchase price-:Though most sellers will state an asking price upfront, you might deem the price inappropriate after conducting your due diligence. So, you should negotiate with the buyer until both agrees on a new purchase price. Be wary of sellers who will agree to a lower price but a higher interest rate. The interest rates could cripple your business in the long term. Only after you have both agreed on the purchase price should you start negotiating other terms of the deal, such as interest rates, loan costs, payment terms, and so on.
- Do your due diligence-: With a seller financing agreement in place, due diligence becomes a two-way thing: just as you need to investigate the business and the seller to decide whether to proceed with the acquisition, the seller also needs to check your credibility and financial strength. Doing a due diligence will help you uncover any hidden but foreseeable problems with the business that may hamper its progress in the long haul. To ensure a thorough due diligence, request to see the business’s financial records and projections, bank references, business plans, legal documents, and everything else you need to get detailed information about the business.
- Agree on seller financing-: Your first step towards buying a business with seller financing is to agree with the seller on that. Though most sellers will not disclose their intent to finance your purchase, they will make this known after you ask them about it or request for it. If the seller is unwilling to enter a seller financing contract with you, then there is no point going ahead with the deal.
- Agree on payment terms-: After you have agreed on the purchase price, offer a down payment, which could be any percentage of the total purchase price. However, don’t offer a down payment less than ten percent of the purchase price. Make your down payment large enough to demonstrate your own investment in the business to the seller. This will also give you some instant equity. After offering your down payment, agree on an interest rate based on your credit history, financial health, and the going rate for commercial borrowing. Then decide on loan terms, such as the length of the loan and whether it will be amortized. Next, decide whether the seller will be actively involved in the day-to-day operations of the business or they will just play an advisory role at intervals.
In all, look for terms that will protect the seller and will be favorable to you as the buyer. And remember to keep enough cash in your business to manage operations, sales, production, marketing, and other business functions. You do not want to spend all of your revenue paying back your loan. Once you have carefully taken all these steps, then go ahead to finalize the acquisition deal.
7. Strike the deal
Just as i stated somewhere above, you should have a contingency plan just in case things don’t go your way. But if the reverse is the case, then you will definitely end up striking the deal. Acquisition is really a boring process with loads of paper work and series of meetings. If things go your way, then strike the deal and move on but if not, fall back to your contingency plan and focus on the next company at hand.
“I think you might see us growing much deeper into banking. You might see us acquiring companies in the banking area. You might see us acquiring companies in the retail area. I think you might see us acquiring companies in the telecommunications. I think you will see us getting stronger in business intelligence.” – Larry Ellison
10 Mistakes to Avoid When Buying a Business
Owning and running their own business can be one of the most financially and emotionally rewarding experiences of your life. You become your own boss. You choose your own working hours. You stay in control of your business’s finances. And you decide how much you earn. Truth be told, only few things can be more gratifying.
One of the easiest ways to achieve your dream of owning a business is to buy a successful business. However, buying a business is not like buying a house or a new car. Buying a business involves too many potential pitfalls that can leave you badly burned. In fact, buying a business can be your worst nightmare if you don’t do it right.
Here are 10 common mistakes people make when buying a new business. Avoid them, and you will have no cause to regret your buying decision.
a. Not knowing why the business is being sold-: Before jumping at any opportunity to buy a business, one of the first questions you should ask is “Why is the seller selling the business?” The answer you get can be all you need to make a well-informed decision. The seller might simply tell you he’s retiring. But he may actually be selling business because a stronger competitor just opened right on the same street, causing a significant reduction in profits. So, you need to determine why the business is up for sale and what the business environment will be like once you take over.
b. Not doing your proper due diligence-: Some buyers are so eager to snag up a new business, they forget to do the proper due diligence. This is silly. Just because a business appears successful and profitable does not mean it has no problems. You need to find out exactly what is owned, leased, borrowed, and owed by the business. You sure don’t want to take over a new business only to be haunted later by a pile of bills, unpaid rent due, and other outstanding debt.
c. Buying the wrong business-: Whether you will be managing a new business yourself or will be hiring managers to do the work, you still need to buy a business that suits your skills, knowledge, interests, and personality. If you are motivated to buy a business only because it appears profitable, the business may not be successful.
d. Overextending financially-: Before buying a business, you must carefully assess your financial ability to run the business. Never buy a business that you cannot afford to run. If you do, you will simply run out of cash to operate and advertise before you have enough cash flow to support your business. It’s like being in the first place during in an auto race and running out of fuel just before reaching the finish line. No matter how well you have been doing until that point, you lose in the end because you can’t cross the finish line.
e. Signing contracts in your name-: When buying a business, never sign contracts, loan agreement, or the lease in your own name. You need to have set up a corporation or LLC to buy the business. If you don’t, you will be subjecting your personal assets to the risks of the business. Remember, just as starting a business from scratch is risky, buying even a successful business is risky as well.
f. Not knowing the value of the business-: When buying a business, don’t be eager to seal the deal simply because “the price seems good“. No matter how attractive the price is, you need to do a detailed financial analysis of the business you want to buy to determine if the asking price is appropriate. Review the income and loss statements, key assets, balance sheets, liabilities, and cash flow statements.
g. Planning to make too many internal changes-: After buying a business, you will no doubt need to make some modification and turn some things around. However, making too many heavy changes, such as replacing old employees with new ones can leave you badly burned. Some employees are so vital to a successful business that the moment they leave without an equally effective successor in place, the business starts to feel the negative impact. Apart from that, training new employees cost a lot of time and money.
h. Relying only on the good news-: Most sellers—especially desperate ones—are good at telling potential buyers a hundred good things about their business, without mentioning the dark sides. So, when that seller tries to convince you that the business has a bright future ahead or gives you tons of reasons not to miss the opportunity, always remember to ask critical questions that will reveal the vulnerabilities of the business. No business is perfect!
i. Buying a job-: One of your reasons for wanting to buy a business is to gain control over how much you earn and to earn significantly more than you can as an employee. A good business acquisition pays you a salary and benefits at least equal to what the business would pay a manager. In addition, the business’s net profit provides a good return on your investment. Anything less is a silly deal!
j. Handling the process yourself-: Buying a business should be a team effort. Even if you have extensive experience in business and marketing, it’s difficult to handle the whole process of buying a business all alone. Other people can give you good advice and information regarding your buying decision. You don’t necessarily have to involve professionals like CPAs and attorneys, but you should get advice from few people.
As a final note, i know most entrepreneurs reading this will say they have no intention of buying a business because they either lack the guts or the capital to do it. Anyway; for those who desire to go through the acquisition process, i wish you all the best.