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15 steps to owning the company that's right for you available resource guides.

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Fifteen steps to owning the company that's right for you

Frank Shannon worked for AT&T for 27 years. His goal was retirement at age 50. But when he was jettisoned with a golden parachute, about two years ago, at age 47, he changed his mind. "If I could run operations for AT&T," he says, "I could do it for myself." He bought a small metal-plating business in Colorado.

Bert Helfinstein bought a business, too. For him the issue was control. He had managed some big companies and grown tired of being second-guessed by boards of directors. "I wanted a situation in which my judgments could prevail," he says.

When Phillip H. Harris purchased a business, this year, he just wanted equity. "I'd always been successful in growing the organizations I was managing," he explains, "but I was never in a position to reap the rewards."

Such sentiments, already common, are becoming epidemic. Business brokers report a surge of interest in small and midsize companies. And the new breed of buyer, typically age 35 to 49, is better educated and more managerially sophisticated than buyers in the past. "We're seeing a lot of people with advanced degrees in business," says Ron Chernak, a broker with First Business Brokers Ltd., in Colorado Springs, Colo. "Before, you saw buyers who just wanted to make a living -- they were buying a job. Now they're looking for good rates of return and accumulation of wealth."

Companies change hands constantly, of course; hundreds of deals are consummated every day. Still, the process of actually buying a business remains stubbornly bewildering. How do you find the right company? How much should you pay for it? Where are the traps along the way?

We put those questions to the experts -- people who have bought companies in the past few years. We also sought the counsel of lawyers, business professors, brokers, and others who traffic in the business-selling world. The result is less a definitive manual (see "The Company Buyer's Resource Guide," pages 5-6, for help finding those) than it is an insider's guide to the steps every prospective purchaser should take. Some are obvious but difficult. (You'll have to price the thing, but how?) Others aren't as tough but are nearly always ignored. (Is this seller ready to leave? Is this an industry you'll really want to work in?)

If there is a general warning running through the comments we collected, it is that business buyers rarely think hard enough about the personal and professional questions that should shape their searches in the first place. The outcome of the hunt, then, turns not on a clear understanding of the role your business will play in your life, but on timing and opportunity -- which is to say, on luck. And there are, unfortunately, two kinds of luck.

The steps:

1. Make sure you shouldn't be starting a company, instead.
You should have solid reasons for buying a company instead of starting one -- and you should know what they are. Buying will reduce risk and save time. Anyone who has started a company knows that it is a long, tough slog to viability. If, on the other hand, you buy smart, your company's operational practices, supplier relationships, and distribution channels will already be established. Key employees and managers will already be there. Customers will know your company and believe, to some degree, in your product or service. And since you are buying existing cash flow, you'll also have a reasonable idea of how much money you can make, not to mention how much operating cash will be needed to make it -- seldom the case in a start-up.

If the risks are lower, however, so are the rewards. Available cash flow will be stunted by the debt you incur to buy the business. And business buyers in any event sacrifice the sheer investment leverage that founders (sometimes) enjoy. You're paying for someone else to assume the risks of starting up; that makes for a bet with shorter odds, true, but also for one with a smaller upside return.

Recognize the buy-versus-start trade-offs, and satisfy yourself that you'll be happy making them.

2. Determine the kind of business you want -- and whether you're capable of running it.
Before you look for a business, do an honest, unflinching self-assessment -- and keep in mind that it will provide the blueprint for everything that follows. What are your goals? What kind of business would enable you to meet them? Are your managerial skills compatible with that business?

In the entire business-buying process, those may be the most important questions that you have to answer. Think hard about what you want. Do you want a healthy business for the long haul or a fixer-upper you can invigorate and sell in a few years? Do you want a retail store, a service business, a manufacturing operation? In what industry? According to brokers, most small-business buyers don't know. "They can pretty much define what they don't want, like maybe fast food, but it's harder to define what they do want," says Don Cunningham, an associate broker with Watson Co., in Spokane, Wash.

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