SCORE Minnesota

Buying Versus Starting A Small Business

July 27, 2010

If you are considering running your own business, the next decision you need to make is whether to start one from scratch or buy one. Of course, there is an upside and downside to each of these options. The main advantage to starting one from scratch is total freedom to start the type of business you want and run it as you see fit. The downside is that the model has not yet been proven which increases your risk of failure. It could take you at least a couple of years to get it off the ground so it is generating positive cash flow. And, you can bet financing will be a problem unless you are a veteran, have a very compelling business plan, deep pockets, or rich friends and relatives.

The main advantage of buying a business is that if the business has been in existence for any length of time, the model has been proven and it is probably generating positive cash flow, if not profits. This situation dramatically reduces your risk of failure. Even if the business has been mismanaged, there is a possibility that you can turn it around and have it humming along in a relatively short period of time. The downside is that you are probably going to need more money up front for the purchase which means you are going to start out with more debt. However, this doesn’t have to be an insurmountable obstacle if you use the right business broker.

I was reminded of this during a recent SCORE meeting when Matt Schroder, of Sunbelt Business Brokers, the world’s largest business brokerage shared some surprising facts about how much easier it can be to buy a business with a reputable business broker. Matt has been operating in the Twin Cities for over ten years and has been involved in over 100 transactions. Here’s what he had to say:

“Sunbelt facilitates the sale of approximately 4000 businesses annually. They have been ranked by Entrepreneur Magazine as the #1 business brokerage franchise every year since 1995.

“There are over 90,000 businesses in the Twin Cities. Eventually every business owner is going to want to sell. Right now, we have over 10,000 businesses listed. Our niche is matching the needs of business buyers with available business opportunities. The value we bring is streamlining the process of the business sale. As is the case with sellers of real estate, owners can do it themselves-but, a broker really helps when:

• Valuing the business
• Maintaining confidentiality
• Preparing the business for sale
• Working with attorneys and accountants relative to understand tax implications
• Properly marketing the business
• Identifying and screening buyers
• Facilitating negotiations
• Preparing closing documents
• Obtaining maximum value for the business

“And, just as is the case with buyers of real estate-purchasers can buy on their own-but, a broker really helps when:

• Providing access to thousands of opportunities
• Understanding the buying process
• Finding a business opportunity that matches their needs, skills, and expectations
• Evaluating market conditions
• Structuring offers and terms
• Arranging financing
• Preparing closing documents
• Performing due diligence

“One question I hear a lot is how much do I need to buy a business? The answer is whatever you want for an annual paycheck is what you need to put down on a typical business purchase plus some extra to cover the debt service you will be paying the SELLER.

“Yes, I said the seller!  90% of all business transactions that take place in our country involve a large component of seller financing. The reason is most business owners do their financials and tax returns with only one goal in mind. That goal is to avoid paying taxes. After all, it’s one of the benefits of owning your own business. Well, that’s all well and good when you’re operating your business but when it’s time to sell and you put those financial statements in front of a banker they say-show me the money.

“Business buyers want three things that link to what bankers want. They want a paycheck, they want some cash left over to service the debt that it requires to buy the business and they want an opportunity for growth and a return on their investment. Banks want to see the same thing before they lend on the business. They need to be shown that the buyer is going to be able to take a realistic paycheck and be able to make some loan payments on top of that so that the bank feels comfortable. Now, having said that, the bank and the SBA want a lot more, but I will have to cover that topic at a later date.

“Here is the main reason why most deals are done primarily with seller financing. The business owner runs a variety of things through the business to minimize their tax bill. Over the years, I’ve seen a variety of creative approaches to business expenses such as Vikings season tickets, travel expenses that have nothing to do with running the business, meals and entertainment that are, shall we say, a bit excessive, vehicles, family members on the payroll that have never stepped foot in the place and so on and so forth.

“When the buyer of a business walks into the bank with their seller’s financial statement and tries to get a loan for a business with those types of expenses it’s usually a short conversation. Those businesses don’t have a very good bottom line so banks don’t think they make much money. Consequently, the bank’s underwriters decline the loan and the deal dies.

“Hence the need for seller financing where there are no underwriters and banking or SBA guidelines. Just the buyer and the seller, each carrying the burden of convincing the other one that they can do the job.  Of course, the buyer will need a down payment so they have some skin in the game. But, it’s a much simpler transaction than going through the bank process. Plus, you don’t need to put up your home as additional collateral to get the deal done.”

If you are considering buying versus starting a business, Sunbelt specializes in businesses with or without real estate and less than $5 Million in sales, new franchises, existing franchise (re-sales) and mergers and acquisitions with sales in excess of $5 Million. They have been in the Twin Cities market since 2000. They have 30 agents and 3 offices here plus offices in Wisconsin and Chicago.

Matt Schroder promised to contribute to future articles on buying a business. So, please watch for them. In the meantime, If you would like more information, you can contact Matt directly at:

Email: mschroder@sunbeltmidwest.com
Website: www.sunbeltmidwest.com
Phone: (651) 288-1629/(612)-751-6868-cell
LinkedIn: http://www.linkedin.com/pub/matt-schroder/2/985/127

To learn more about how to start, operate and grow a successful business contact SCORE by clicking the link on the right to the office nearest you or click here to request free face to face counseling.

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Susan Fronk, St. Paul SCORE
View more posts by Susan Fronk

Filed under: Business Planning,Capital,Entrepreneurship,Financial,Management,Start-Up

Tags: business broker, buying a business, financing, Matt Schroder, score, seller financing, starting a business, Sunbelt Business Brokers