Get smart before buying an existing business

Editor’s note: Michelle Stockman works with Little Rock-based Arkansas Capital Corp. to promote entrepreneurship development around the state. Stockman earned a bachelor’s degree from Loyola University-Chicago in communications and fine arts, and earned a master’s in entrepreneurship from Western Carolina University. Her thoughts on business success appear each week on The City Wire.

Starting a business often comes with a long list of items to get done before opening the doors. However, buying an existing business is equally (if not more) difficult than starting from scratch.

Many feel the recession has brought great opportunities to buy businesses at “sale” prices. Yet this recession has made finding the capital to buy a business far more difficult.

Besides banks restricting their lending practices, many potential business purchasers simply do not have the access to capital that was available just two years ago. If a purchaser does have a willing lender, purchasers have been pinched even further with higher down payments and loan securities.

Also, the idea that this is a business buyers market is false. BizBuySell.com has noted that current business owners are holding off on selling their businesses until the economy does recover. Not willing to take a loss on the business, current owners are waiting for business valuations to rise again.

According to Ann Field on OPEN Forum by American Express, if you’re shopping for a company, here are some ideas to take into consideration.
• Try seller financing or earn-outs.
This is where buyers pay sellers a percentage of the purchase price up front and the rest over a specified period of time, with interest. Another approach is to use an earn-out. In that case, you set certain parameters — usually specific gross revenue, profit margin or net income levels — that have to be met annually for a period of two to three years. Then, you pay the seller a percentage of the total price if those benchmarks are met. Usually, the seller also has to stay on as an employee for a period of time.

• Don’t overlook the importance of integration.
For an acquisition to be successful, you need to make sure you can combine the two businesses without too many hiccups. To do that, the business owner needs to “look for the gaps.” That could include anything from different accounting procedures that might not jibe, to an inefficient sales automation system likely to create inefficiencies and slow down operations.

• Understand how the economy will affect the future growth potential.
Investigate previous cut backs to ensure your seller hasn’t made significant changes that caused real damage. Similarly, if you’re buying a business that’s experienced a sales decline, determine if the economy was the factor behind the decline. If not, investigate what could have caused the decline in sales/revenues.

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Stockman can be reached at [email protected]