Buying an existing Business?

If you can afford it, sometimes the best way to be an entrepreneur is to buy an existing business. Many times buying an existing business can be the best deal, especially if you get it for the right price and you can make some good money from the investment.

Frequently I am asked, “What is a business worth?” There are many answers to that question but the simple answer is whatever someone is willing to pay for it. One book I read said generally it is 2 to 4 times the company’s net yearly earnings plus assets. The longer a business has been going, usually the higher the multiple someone is willing to pay. If the business has been running for 10 to 20 years and has a great track record of income, the more confidence the buyer will have that they can continue making that income. Sometimes businesses which have been in running for years can sell for 6 to 10 times income or more especially if it can be shown the industry and the company is going to remain strong.

If a business has only been open for a short time or is losing money, it might sell below what the owner has put into it. If an owner is desperate to sell for whatever the reason, they usually will be forced to sell below cost and sometimes much below. One candidate I am working with wants to open a franchise in the Phoenix, AZ area. It was going to cost him 225k to 275k to open a new franchise in the perfect industry for him. We found him a franchisee with the same franchise company and where the owner is willing to sell his 4 year old business for 115k. It already has over 300 steady paying customers and is making 40 to 50k a year. It seems the only negative is he will have to travel across town to get to his business.

It is almost a no brainer; buy a business for less than half the cost of a new one and it is already making an income. Even if he cannot increase the profits any by giving customer service (which the previous owners have not been doing) he will still payback his investment in just over 2 years.

It is important for anyone buying a business to do it the right way, making sure they are protected. Having professionals involved will be essential to prevent mistakes. Hiring a good business attorney and a CPA will be money well spent. If you are using a business broker (similar to a real estate broker but only sells existing businesses) to help you find a business, they can be of assistance. You need to be a little careful in using their advice too much for they only get paid, if you buy.

I will try to talk more about buying an existing business in my blog next week.