It was December of 2009, between Christmas and New Year’s to be exact. I had been discussing with my wife that we should buy a business. Having recently gone through the layoff scare of 2008 (see Why I Started This Blog), I had jumped firmly into the financial independence bandwagon and was determined to get a side hustle going.
With my job demands at that time however, there was no way I could pick up anything extra on the side, so I talked to my wife about having her run a business from home. And I wasn’t talking about starting a new business, I thought that was too risky for us. I was talking about buying an existing business that already had cash flow.
I had already done my research and found a few that fit the bill. The conversation went something like this:
Me: “Hey honey, I found the perfect business for you to run from home.”
Her: “Me? Really? What is it?”
Me: “Well, it’s an online store, which is awesome, so you can run it from home while you are taking care of the kids. How great is that?”
Her: “Great, but what is it?”
Me: “Well there’s not much inventory, so we could probably keep it all in the basement, so you wouldn’t have to go to a warehouse. That’s perfect, right?”
Her: “Suuuuure, but what is it?”
Me: “And it makes the right amount of money, so it will be super helpful in saving for the kids’ college and stuff like that – cool, right?”
Her: “Well yes, but what actually IS the business?”
Me: “Yeah, so, that’s the best part, its a nice and easy product, its an online store for …fishing lures!”
Her: a very long awkward silence…followed by an expression of both disbelief and confusion.
So, we didn’t buy that business. It turns out that I was more interested in fishing lures than she was – go figure. In her defense though, she’s a vegetarian and an animal lover that hates fishing, so in retrospect, not a very good fit for her! However, I was excited about the idea of making some extra cash.
We might not have bought that business, but we had set the wheels in motion. If you have never thought about or looked into buying an existing small business, it’s not a very difficult thing to do. Here’s an overview of how it works.
Before you do anything, you first have to decide that buying a small business is right for you. What are the benefits and downsides of buying a small business instead of starting one from scratch? That’s what I’ll talk about in this post.
Then, you have to know where to look in order to find the businesses that are listed for sale. Once you start looking at businesses, you’ll have to develop some criteria in order to qualify them to see if they are right for you.
After you’ve found a business that meets your qualifying criteria, it’s time to sign a confidentiality agreement and get more details. If you’re comfortable with what you’ve learned so far, it’s time to finalize your financing and start working towards closing the deal.
But, first things first. Why would anyone want to buy a small business?
Why Buy a Small Business?
So, why even buy a small business? Just start your own from scratch, right? It all depends on your objectives. From our perspective, we were looking for ways to increase our cash flow. That made buying an existing business with existing paying customers attractive.
If you start a business from scratch, that often takes a significant investment of time and who knows when the money will start. Will it even work out? There’s no guarantee. In fact, the odds are against you.
When buying a small business, there’s still risk, but it is less. You already have returning customers on day one – how awesome is that?
Benefits of Buying a Small Business
There are lots of benefits to buying an existing small business, here are a few:
- Become the CEO on day one
- Acquire an existing customer base and goodwill
- Already profitable
- Predictable cash-flow
- May already have trained employees in place
One of the best benefits of buying a small business? You are the CEO of an up and running company on day one. You get to set the direction of the company, you get to motivate the employees (if you have any) and you get to decide how and when things get done. You have flexibility and guess what, no one can fire you or second guess your decisions!
You also start with an existing customer base. One of the most difficult parts of starting a new business is finding customers, so having them already is a huge advantage. And hopefully, they have already had good experiences with your business, so they will be coming back for more.
When deciding whether you want to buy a business, you get to look through their financial statements, so you will know how profitable they are. From day one, you will likely have positive cash flow (not counting the purchase price, of course). And, based on the historical information that you would be able to review as well, you would know how predictable the cash flow will be.
Finally, if the business has employees, you will get them as well. No hunting around for people and trying to figure out if they will be a good fit or not. No worrying about how to train people. You will have people in place that are trained and ready to go. That is a huge leg up as well.
Downsides of Buying a Small Business
Now, don’t get me wrong, buying an existing business is not all roses and buttercups. There are downsides as well.
- The buck stops with you
- The business could have a bad reputation that you would inherit
- It’s more expensive to buy an existing business
- The seller knows more about the business than you do and there may be unpleasant surprises coming
- Existing problem employees
When you buy a small business, the buck stops with you. Want to make a bad decision? Go ahead, no one will tell you otherwise. When you live by the sword, you die by the sword as well. This is one of those cases where being the head honcho is both good and bad.
You need to be careful as well that you don’t buy a business that has a bad reputation from customers or suppliers. That reputation will haunt you moving forward.
What about price? Do you want a nice, tidy, small business that consistently delivers steady cash flow with regular repeating customers that grows steadily year after year? Me too, be ready to pay for it.
Generally, the better the business, the more it will cost. This is not necessarily a bad thing, since you will be getting cash flow from the very start, but it may very well cost more than trying to start your own small business.
When you buy a business, the owner always knows more about the business and the current environment than you do. Does he or she know something that they are not telling you that will negatively impact the business soon? It’s hard to say, and it’s a risk. I can tell you this, don’t buy any taxi companies any time soon… Uber anyone?
If the business has employees, that’s a risk as well. Presumably, if they are long term employees, they are well trained and know what to do and do it well. You can’t be sure though. When you buy a business you will generally be taking their employees as well. If they’re not your cup of tea or are otherwise troublesome, you’ll have to figure out how you want to handle that. Refer to “the buck stops with you” up above.
What We Did
It was one week later, after the whole “fishing lure” fiasco, and I was in the basement running on the treadmill. My wife came running down the stairs, “I found it!” “Found what?” I gasped between strides. “The P-E-R-F-E-C-T business for me to buy! What do we do now?”
I quickly yanked the emergency stop cord on the treadmill, bringing it to an abrupt halt – it was “go” time!
This is the first in a series of posts about buying a small business and how we purchased our first one. See the second post in the series at, Buying a Small Business: How to Find One.
Have you ever thought about buying a small business? Why or why not?