As a banker, I have been fielding an increasing number of calls these days from people who have been laid off and are looking to buy businesses.
As one who embraces the entrepreneurial spirit, I can see the reasoning: Because many companies are downsizing or just struggling to stay afloat, finding a job is becoming increasingly difficult. Also, with loan rates and property prices at record lows and special stimulus packages designed to benefit small-business owners, this could be an excellent time to buy a place and start a new career path as a business owner.
However, before you go ahead and close on a great deal on the restaurant for sale down the street, here are some points to consider:
1. Look at yourself and your needs. You need to think about what type of business you want to enter. What will make you feel fulfilled? How much money do you need to live on, and will this business provide that? What will you do about health insurance, life insurance, retirement planning and succession planning?
2. Examine your skills. Are you honestly qualified to run this kind of business? Do you need some extra experience or knowledge about the industry you will be entering? Will some classes or an apprenticeship help you make a more educated decision?
3. Consider your home life. Owning a business often takes more time and more money than most people think. Are you and your family prepared to take on the hours needed to make a business successful? Do you have enough money to be able to put some aside for planned and unplanned costs, such as replacing silverware at restaurants or surviving an usually rainy summer that decreases your sales?
4. Review your personal finances. Even before you start working on the business side of the financials, you need to go through your personal finances to make sure you’re covered. Go through your current household budget and match it up with what you would need to make from your new business. Be sure to include health insurance, life insurance, child care, transportation, and rent as you figure out your expenses.
5. Assess your financial ability to buy a business. Do you have good credit? How much money can you invest? Do you have money for the closing? Will you have excess money once you close? Will you have money for future capital expense needs?
6. Investigate the business you’re looking to buy. Just as you wouldn’t buy a car without test driving it, you need to examine the business and industry you would like to enter. To begin, check out www.first-research.com. For $100, you can investigate almost any industry. You receive an industry overview and information about challenges, trends, forecasts, finances and the competitive landscape. This is absolutely necessary to make an educated decision on buying a business.
6a. For a bit more money, you can hire a CPA to audit the specific business you’re looking at. Spending roughly $5,000 is well worth the investment because it will give you assurance that the information the seller is providing is accurate and the business is on a solid financial footing. If you are about to lay down $80,000 to buy a business (and take on a $400,000 loan), the upfront cost of an audit is a drop in a bucket-and a very useful one.
6b. Also, I highly recommend talking with people currently in that line of business. Ask them about the work involved and their assessment of the current and future climate for that business. Ask them about the challenges they face as well as the opportunities they see.
7. Don’t forget due diligence. When learning about the specific business you would like to buy, you cannot just take a seller’s word for absolute truth. If while explaining cash flow the seller begins to tell you about adding back expenses to the cash flow, you need to take a step back and see if that’s true. I have seen too many businesses go into default because they based their cash flow on what the seller said versus what was real. The audit can uncover this in advance; the buyer really needs to beware of any statements that might not be true.
In the end, buying a business is an exhilarating process but one that needs to be entered with honest self-evaluation, extensive research and some caution as well.
James Carriero is Rochester market president of KeyBank N.A. He may be reached at (585) 238-4181 or [email protected]
09/11/09 (C) Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303.