Buying a company may be a smart move. But it's never easy.
Buying an existing enterprise, as opposed to founding one of your own, may be the fastest way to become a business owner: If all goes well, you could be CEO within three months of identifying a company to purchase. But due diligence is key. Do your homework and you'll end up with a proven product or service, a trained staff, and a built-in clientele. Cut corners, on the other hand, and all you're buying is someone else's headache.
When shopping for a business, the first thing to look for is the potential for sales growth. After all, if you can't improve the business, there's no point in buying it. Finding a company that fit the bill was a big challenge for Mark Forst, a former restaurant manager who decided to go into business with his father, Mel, a retired insurance manager, in 1998. "We wanted a company that could use better marketing and service, one that we could take from the local to the national level," says Forst.
Forst hired a business broker -- not a bad idea, considering that commissions are paid by the seller, not the buyer. He also spent several weeks combing through the business listings in the Fort Lauderdale newspapers until an advertisement for something called Rip's Uniforms caught his eye. The business, which specialized in outfitting postal workers, had the right price -- $100,000. It looked even more attractive when Forst began researching the uniform supply industry and learned that, while there were a number of local distributors scattered around the country, there were only five national suppliers. The question was how to grab market share. He and his father spent two months interviewing the company's previous owner, its vendors, and its sole employee. They even tapped postal workers to find out how they could win their business. Most everyone had an idea or two about how Rip's could be improved.
Once you think you've found the right match, the devil is in the details. Hire a lawyer and an accountant who specialize in setting up new businesses. Expect to pay each roughly $250 an hour for about 10 hours of work. Obviously, you'll want to see the company's balance sheets, bank statements, and at least five years' worth of tax returns. But don't stop there. During his due-diligence process, Forst discovered that Rip's Uniforms had more debt and less inventory than the seller had realized -- exactly the kind of hidden problem you don't want to discover after the ink on the contract has dried. To cover your bases, request additional documents that can help shed light on the company's financial health. For instance, ask the seller to hand over copies of recent federal withholding forms to verify how much it is paying its employees. If the business operates out of rented space, talk to the landlord to make sure the company owner is in good standing, and, if possible, obtain a copy of the lease to double-check the terms. Discovering the discrepancies in Rip's financials proved to be a coup for the Forsts, who eventually whittled the price down to a mere $10,000. Last year, the company, renamed A.M.E.'s Uniforms, generated $3.1 million in revenue and earned a place on the Inc. 500 for the second year in a row.
Of course, there are other red flags. For example, if the company for sale is only a few years old, with a relatively young owner, be wary, warns Mic Mayer, a business broker at Seattle-based Windermere. It's much more common for sellers to be retirees, and a younger one might just be trying to get out of a lousy business.
At the end of the day, after all that due diligence, it's important to simply feel good about the company you're thinking of buying. Lon Deckard found that instinct played a key role when he purchased his second business in 1991. A fly fisherman for as long as he can remember, Deckard discovered that one of his favorite fishing rod manufacturers, Thomas & Thomas, was for sale. Thomas & Thomas, founded in Maryland in 1969, is legendary among fishing fanatics, and Deckard sensed that the company -- with its solid reputation, quality products, and loyal customer base -- presented a great business opportunity.
Deckard already owned a label-printing company, purchased just a few years earlier, but the chance to make fishing rods his day job was too good to pass up. After just one meeting, he also had a feeling that he could trust Thomas & Thomas' previous owner, who openly discussed both the pros and the cons of the rod-making business. "If they're forthright and honest, the deal can be done pretty easily," Deckard says. He's glad he trusted that instinct. Looking back, he says, the business has had its ups and downs. "But I'm a fly fishing zealot, and I love every day."
Sidebar: Business Buying 101
Think Big First and foremost, figure out if and how you can boost the sales of the business you're thinking of buying.
Do Your Homework Perform an independent checkup by talking to landlords, vendors, customers, and employees.
Look for Red Flags It's suspect when a young owner is selling a new company, so be sure to find out exactly why he's bailing.