Fast Company recently had an article titled, “Forget Startups Just Buy a Small Business from a Retiring Entrepreneur.” The first sentence was, “Sure, you may want to found the next “Uber for [insert service here],” but that’s not the only entrepreneurial path you can walk.”
They gave eight tips on how to best make an acquisition and I’ll comment on three of them (one of the others being “perform due diligence,” which even partially competent buyers automatically do some of).
But first, let me take issue with one of the facts mentioned. Using statistics from BizBuySell.com the article stated the median price of businesses at the end of 2016 rose 8% from 2015 to $216,000. Let’s face it:
If someone buys a business for $216,000 they are buying a job, and a mediocre job at that.
For reference, the average price of my clients deals over the last year or so was about $3 million, and every one offered the buzzword buyers use and want, “scalability.” The micro deals from the BizBuySell.com stats mean the buyer/owner will spend their time working “in” the business not “on” the business, and that means a rut that’s hard to get out of.
Now for the top three points in the article.
Figure out how to appeal to the owner. Or, as I’ve preached for years, build a relationship because nobody will buy from or sell to someone they don’t like. The article makes a great point, “Prospective individual buyers may have an edge; many retirees want to sell to someone with similar values, hopes, and dreams. It’s their baby and they want to bring their grandkids by it in 5-10 years and tell them how this very successful business used to be theirs.
Be ready to add value–even to a successful business. I like their line, “If you’re merely keeping the lights on, then you have a boss: the bank.” Bill saw who he could immediately add value by turning the website from a brochure to an ordering system. Matt started promptly following up on leads (amazing what people coasting don’t do). Richard but in a sales system and culture, which attracted customers and high-quality employees.
Have a 100-day plan. I mention this one because I stress it to buyers and sellers. Don’t fall into the following endless loop the day after closing:
- Buyer: Tell me what I need to learn.
- Seller: What do you want to know?
It’s why I give my clients an outline of a transaction plan and encourage them to formulate their own details with the other party. The transition often gets overlooked as the rush to close gets frantic (and overwhelming with administrivia). Three key transition points:
- Initially the buyer should shadow the seller to see what he does on a daily basis.
- After three to four weeks the seller should disappear for a week to let the staff know the buyer really is in charge.
- Make sure the transition agreement covers the seller being around for annual events that don’t fall within the contracted time. This could be trade shows, contract renewals, annual closing of the books, or other things specific to the business.
Entrepreneurism isn’t for everybody and if it is for you, and especially if you don’t have an idea for the next greatest thing (or don’t want to put in 80 hour plus weeks), consider buying a business. It’s faster, cheaper, and easier to finance. You trade your capital for immediate cash flow, i.e. you get a paycheck on payday just like everybody else.
And in closing, a great line from the Fast Company article, “If you’re buying a company because you want to be your own boss but don’t plan on making any changes once you take over, keep your day job.”