Buy existing business or start one?

Question

Business owners. Who bought an existing business vs starting their own and did it turn out to be a good idea? Also, did you use a business broker?

Frank Chin · Answer

@Marco Morkous

I did both. I started a business called Software xxx, where the plan was to install accounting software, a business then in it's infancy, My customers, not computer savvy, want me to run over when problems arose, and think $100 for a morning's work is too much. Gave up on it after 2 years. I was not in the right business niche to make good money.

I then decided to buy a business and I did it through a business broker. I was looking for a business that's established, profitable, runs itself. After a year, found one in my price range. It was owner financed where the seller provided financing but I later paid off with a lower cost SBA loan. Business been there 50 years, run by an in house manager, has 8 employees. It's in the auto repair business, where I had no experience, but the owner I'm buying it from had no prior background in it either, he was Russian immigrant who started here as a taxi driver, saved up enough to open up 3 shoe stores, but sold it all when his wife was seriously injured in a robbery.

One word of advice. Robbers like to rob businesses where its manned by one person. especially a women, which was the case for the shoe store owner. The repair shop has eight employees plus customers usually waiting around for their cars, so robbers would avoid it. My dad ran a Laundry and where he bought it in his 20's, bought the building it was in 10 years later, paid off the commercial property, and was making a good living. In the 1980's there were numerous robberies in the area, so I told him to ditch the laundry and collect store rents instead. The building had two stores. He was almost robbed once when a customer didn't look right, my mom called me from the back where I was doing some building repair, went into the store with a hammer in my hand. The potential robber saw me and quickly skipped. He then robbed a business a block away manned by a single woman.

How do you get started on this? For a married couple, get yourself down to living on one salary. We did that by investing in a 3-plex where the rents cover the mortgage and expenses. Some businesses take some time to make money even ones that you buy so this gets you a safety net. When the business takes off, then move to your dream mansion.

Now, some businesses, dependent on a retail location, when you rent, runs the risk of the owner selling the building or not renewing the lease so you can lose everything. That's why my dad bought the building. The auto repair shop owner had a option to buy the building which he gave up. I had the business a few years, made money but sold it. Many of these smaller businesses are cash based, doesn't report everything, which makes me nervous. And with with 8 employees, I additionally have personnel issues.

Charlie MacPherson · Answer

@Marco Morkous Starting a business from scratch is a double-edged sword.  You have all the bragging rights, if that matters to you.  You get all the glory if it succeeds, but you get all the disgrace if it crashes and burns.  Everything that goes right or wrong is all on you.

The advantage of buying an existing business is that if you do it right, you get to stand on the shoulders of giants to take it to the next level.  If you buy it right, you don't have to reinvent the wheel.  You get to come in to a business that's running and already profitable and concentrate on growing it.

Buying opportunities are everywhere right now as business-owning baby boomers are hitting retirement age in droves.  I see a lot of businesses like this, where the seller has significant opportunities to build, but says something like "I need young blood in here to do that.  I'm tired and just don't have the energy".

One example is a heating oil dealer who doesn't sell propane.  There is an investment involved in a delivery truck and residential tanks, and he knows he's leaving a ton of money on the table.  But then again, he's making almost $300K net doing what he's doing.  He's happy leaving that growth to a new owner.

Another is an FBO (airport operator).  She doesn't offer air charter services and knows there's a significant demand for it.  But she's in her mid-50s and doesn't want to make that kind of commitment at this point in her life.  She has a nice business and is making a good income as things sit now.

These are the kind of opportunities that a new owner with fire in the belly can buy and grow.

When it comes to business brokers, we're a lot like a listing agent in real estate.  Speaking at least for my company, we have exclusive listing agreements, so if you want to buy a business we represent, you have to work through us - even if you approach the seller directly.  I think it's safe to say that most business brokers work the same way.

One difference is that many business brokers, my company included, don't co-broker deals.  Speaking for us, we don't need to.  Everywhere a buyer is looking for a business, we're there advertising prominently.  Co-brokering also weakens our confidentiality with sellers by opening up details to those outside of our company.

You can certainly go out an approach owners directly.  You should have a CPA help you to arrive at a valuation as it's as much art as science.

Good luck!

Frank Chin · Answer

Thanks. You're probably referring to my stories on robberies.

The best one I heard was from my dad. He patronized a local bakery, usually around the quiet time of 10:00am, after the morning rush. There was another customer sauntering around the shop. Then he heard one of the sales girls yelling to the other "go into the kitchen and ask Fred or Tom when the cookies be ready, it's taking forever". So the other girl then rushed into the kitchen. The other customer then left without saying a word or buying anything.

After the other customer left, the sales girl told my dad the guy was there a while casing the place. There's no one in the kitchen, the kitchen crew gets in at 4:00am and left at 9:00am. The whole act was to convince the robber there is a lot more people in the place. My dad thought that was a cute trick despite the danger. He could've walked into a robbery if not for the girl's quick thinking.

Tim Delaney · Answer

@Marco Morkous before I bought my business I used to think I had to start my own to be truly successful- I figured that a “used” business wouldn’t have growth or scalability potential. Then an opportunity to buy a business fell in my lap, and while that initial opportunity didn’t work out, it opened my eyes to the fact that many businesses are not run efficiently or up to their potential.

So I used brokers and eventually found a great business that I still own and run eight years later. I was also able to 4x sales in that time and increase profitability way more than that. I have since started a couple other businesses and I do like that route as well. The advantage to buying, assuming you carefully vet the business, is that you could have cash flow day one and not the uncertainty of when you may be able to pay yourself when you start your own.

Ryan Thomas · Answer

@Frank Chin

That was a treat post Frank! Something I never would’ve taken into consideration honestly!

Buy existing business or start one?

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