Our ask-the-expert forum at Bplans.com presented me with this question today:
Where do I start? My boss said he would sell the business for $500,000. What would be the best way to go about getting this business; and what should I know?
Of course this might be the opportunity you’ve been waiting for, but let’s also understand that your question is even more open-ended and complex than if you’d been offered a house to buy. You start with the problem of what it’s worth, objectively, then add the problem of how you’re going to finance the purchase. And all of that rests on the problem of whether you want to run a business and know how to run it. Books have been written on this stuff. In fact, the amazon.com search for books on “buying a business” produces 18,623 results.
None of these are by me or any of the authors I know and recommend, I’m afraid, but I did notice that the first one on amazon.com’s list is Fred Steingold’s book, which is published by Nolo Press, and I know and trust that publisher. Also, it’s from late last year, so it’s not going to be sadly out of date.
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The Complete Guide to Buying a Business (book with CD-Rom) by Fred S. Steingold Read more about this book… |
I’m going to help with as much information as I dare put in a blog post, but at best I can point you in a few of the right directions:
Quick Information Fast
- There’s a series of articles at Bplans.com in the buying a business section. Those are free and not linked to any particular vendor of services (although I think I should add that I’m very biased, because I’m the founder there and a still-active contributor, and I wrote some of those articles).
- Do a Google search for “buying a business” and look at the several objective information sites that come up. Notice especially the links to information at Entrepreneur.com and AllBusiness.com; both of those are good, all-around information sites that aren’t just selling you their services (they do host ads, but they have pretty good editorial content).
The Problem of Valuation
Things would be easier if there were a simple way to establish the real value of that business, but there isn’t. The name of the problem is “valuation,” and valuation formulas go all over the map. If you can get hold of the Inc. magazine May 2008 issue, it has a good summary of the different formulas for determining the value of a business, depending on factors such as what kind of business, where, how big and so on.
Or consider this: What the business is really worth depends on its real financials, adjusted for lots of things owners sometimes do to disguise the truth, compared with comparable sales of similarly performing businesses of roughly the same size. Add a kicker for growth or good special circumstances, or a discount for lack of growth or bad circumstances. Circumstances are hard to describe, but things like new competition, new products, recent successes or failures, debt, hidden debt, problems with names or intellectual property–there are all kinds of possibilities.
The Problem of Financing
What happens most often when employees buy a company from the owners is what’s called a leveraged buyout, or LBO. It’s not unlike buying a house with a mortgage and a down payment. The business borrows as much as it can from a bank to pay the owner and buy him or her off, and you put in the rest, leaving the owner with no ownership but a lot of real money, and you with ownership of a company that is then heavily indebted. There are other ways to do it, but–and this is assuming that it’s worth the half million that the owner says–do you have the money?
Now, Seek Professional Help
So there’s a head start for you, some research to do, some reading to get you up to speed; and from here on you need professional help. The best help is an attorney with good general small business experience (specific business buying and selling is even better) whom you know and trust. If you don’t know any attorneys, start asking people you know for recommendations, and start interviewing attorneys because you’re going to need one. You might also need the help of a business broker, but if you have the right attorney, he or she will recommend the other professionals you need.
Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry.
