Dear Reader, while I have been a member of California Association of Business Brokers for 3+decades, most all my business sales have been the small mom and pop businesses that no one else wants to touch because the business is just too small. While the largest I've sold was (in today's market) about at $4-million hardware store, I have found simple ways to serve as consultant to help sell these small businesses. I can't help everyone this way but I can help a surprising number. These transactions are often stealth in nature where only a few people even know they are taking place. This article below is written by persons (competitors actually) who I hold in very high regard as to their experience, wisdom, and knowledge and so I share it with you while giving them credit. I work in the East SF Bay Area, Livermore, CA, but their comments are universally applicable.
Contributor: Peter Siegel MBA Reference URL http://tinyurl.com/msnr8f4
Some would-be entrepreneurs in California are interested in buying a "cheap" business for sale. One reason is limited funds, and the idea to start their entrepreneurial career by using that small sum to take over a company, and then build it into an enterprise that is worth much more than was originally invested. Yes, there are ways to find businesses with growth potential that can be purchased with modest investments. But before offering any ideas about finding cheap businesses, it's important to review some of the risks involved. And to suggest how to identify deals that come with an appealing price but little in the way of a promising future.
Why a Buyer Might Want To Purchase A Cheap Business
As many buyers know, the financial performance of a company is one of the key factors that determine its value. A company with few assets but a good revenue stream is likely to be worth more on the business for sale market in California than a business that is offered with a lot of equipment and inventory but has little in the way of revenues and profits. This fact should be kept in mind by anyone searching for a cheap business. If the business can be acquired for a few hundred, or for a few thousand dollars, it's unlikely that it has produced much profit in the recent past. As a "starter" business that someone can use to learn how to run a company, and perhaps build into a larger operation, the business that can be purchased for little money might make an intelligent acquisition. But don't spend $5,000 for a business and expect it to return your investment with its earnings in a few months.
Buyers who pay little for a small business might have a strategic reason to do so. Example: Hank owned a growing floor covering business and always was looking for opportunities to buy out competitors who were not doing as well. When he was able to take over similar businesses in his area, for just the cost of their inventory, he wanted to do so. It would mean he also would get their customer lists, any commercial accounts, and perhaps one or two employees who were outstanding at sales or floor installation.
Some Buyers Can Afford More Business Than They Think
For those seeking cheap businesses because there isn't a small fortune in their savings accounts, it's useful to understand the principal of leverage as it applies to business purchases. Andy had only $12,000 to invest in a food service and discovered that there was nothing for sale in that price range. But by using that amount for a down payment, he was able to acquire a little cafe for $42,000. It meant going into debt for the difference, but he was willing to work for no income while he used earnings from the business to pay off the seller - who had carried back a note for $20,000, and the bank that provided a $10,000 loan. The obligation to the bank was secured by equity in his home and the $10,000 was given to the seller who now had a $22,000 down payment and was willing to carry the balance.
A good way for a buyer to learn what he or she can purchase with the money available is to talk to a specialist in business purchase financing - find a list of business purchase financing advisors here. A specialty loan broker will help a prospective buyer to get pre-qualified by one or more financial institutions that might be called on to help with a purchase once a desirable business is identified. That process will teach a prospective buyer what he or she ultimately can afford and will provide ideas for using leverage in a purchase.
For Some Cheap Businesses - Buyer Beware
Among the offerings advertised as cheap or inexpensive businesses to buy are asset only sales and business opportunities. If a seller is able to get rid of a retail business, as an example, for just the value of its hard assets, he may be receiving more than the business is worth. Some of California's long established retail companies are no longer selling enough of their goods to cover expenses. They probably don't represent an intelligent business purchase even for the buyer who pays only for the shelves and the mostly un-sellable merchandise stored on those shelves.
Business opportunities, as distinct from existing businesses, are offers for a buyer to invest in an idea for making money and some of the components needed to implement the idea. Direct sales operations and other work-at-home offerings - situations where the specific operation to be purchased will actually be created by the buyer--are examples of business opportunities. And they often can be purchased for a few hundred, or a few thousand dollars. Since not all opportunities are as promising as advertised, the buyer is advised to look at them very carefully and insist on receiving the disclosures from the seller that now are mandated by Federal law.
I would be interested to see what other BizBen viewers and Advisors feel about this topic, please reply to this post or comment above with other ideas and suggestions.
Contributor: Joe Ranieri - Restaurant Broker - Orange County Area
Great article Peter.
I always advise my clients who are just starting out in business to watch their working capital, especially for the first few critical years. One of the pitfalls that I have seen time and time again is someone who does extensive tenant improvements to a restaurant they bought, and then later runs out of money. It's important to anticipate things like a refrigerator going out, etc.
When selling a cheap business the seller should be even more cautious about explaining the financial situation of the business. If they do carry a note, possibly have a third party service the note, so that it seems more official each month when the buyer receives a statement in the mail.
Contributor: Joel Miller: Broker/Consultant, Elderly Care Services
Isn't it interesting to see all the hype and activity around "Fix and Flip" in residential housing? Buy a beat up old house, fix it up and profit big time, or at least that's what the reality t.v. shows portray. It's being done everyday and will most likely continue.
Yes, big bucks can be made in the housing rehab business, but why not in the small business world as well?
I have several Clients who enjoy doing just that. Buy a business that is under-performing, add value to the business and resell when the market is ready. Enjoy the profits!
But what does it take to fix and flip a business?
1. Concentrate on a niche business; laundromats, care homes, print shops.
2. Study the market and watch for supply and demand.
3. Know what type of financing is available for when you purchase and resell.
4. Study the trends.
If played correctly, "flipping" a business can be just as much fun and profitable as the reality t.v. shows portray for "flipping" a house.