It’s always driven me a little bit batty that the business media and pop culture seem to think entrepreneurship is only about starting businesses. It seems like everyone forgets that buying a business is another way to become self-employed.
I have bought a half-dozen businesses and bought into many more. As a consultant, I have also worked on hundreds of transactions with clients in the architecture and engineering industry. And what I’ve discovered is that there is opportunity all around us. It’s everywhere.
Here are my thoughts:
I like distressed businesses with owners who are motivated to sell. Let’s face it — not everyone is cut out for business ownership. Sometimes, people end up in business because they inherited one or felt obligated to take over a family business they weren’t interested in. Or, sometimes, people get sick, get divorced, or get tired and want to get out. When you combine that with a need for the owner to make long-term obligations for capital improvements and leases or meet payroll with a declining revenue stream, you will find many owners who want to get out. Motivated sellers are the best sellers.
When you have a motivated seller and a business that needs to be turned around, you have two things as a buyer that are working in your favor. One, you have to pay less than what you’d pay for a growing, profitable business. That makes it more affordable. Secondly, the owner will be much more likely to finance your purchase. That’s a huge plus. Owner financing a distressed business may be the only way to sell it. Some owners will walk away if they can get off the hook for continuing payments for leases and payroll. That’s a “free” business, and I have run into several of those in the last few months right here in Northwest Arkansas.
An unprofitable business is a lower risk to buy because if you can turn it around, the payback period will be shorter than it would be for a profitable business. That is counterintuitive, as many business buyers are preoccupied with acquiring profitable companies. But profitable businesses cost more. And if that doesn’t continue under your ownership — which could happen for many reasons — you can get in trouble quickly and drive up a long payback period.
Turning around an unprofitable small business is easier than it sounds. In my experience, most have similar problems. The owners are disengaged. That is likely to create disengaged employees. They have stopped investing in anything that improves their business, like new tools and equipment, new product or service offerings, new facilities and especially marketing. I don’t think I have ever seen a struggling business where the owners are doing anything with it marketing-wise. It’s typical to see they spend nothing on marketing and promotion and then wonder why revenues are flat or declining. They will all tell you that “word of mouth” is the best marketing. Hogwash. Committing to consistently spending money on advertising and PR can make a huge difference.
Another great thing about an existing business is its clients, customers and financial history. When you take over, you will have a fairly predictable cash flow. You can’t say that about a cold start. Everything is unknown, and preparing for what happens when you go “live” with your new venture may be difficult.
I could keep going here, but hopefully, I have convinced you that buying an existing business could be faster, cheaper and easier to finance than a cold start. It’s a strategy to get into business or expand an existing business. So, what are you waiting for?
Mark Zweig is the founder of two Fayetteville-based Inc. 500/5000 companies. He is also entrepreneur-in-residence in the Sam M. Walton College of Business at the University of Arkansas and author of the award-winning book, “Confessions of an Entrepreneur.” The opinions expressed are those of the author.