East Bay Score Chapter 506 Blog

Most everyone searching for a business opportunity has encountered the question about whether an enterprise being considered is a sound business investment or merely buying a job.
 
The distinction between the two often is unclear. But it’s important for entrepreneurs to consider this question when establishing criteria for the search, and when becoming educated in order to make smart buying decisions.
 
As a guide for determining whether you’re buying a job or purchasing something more than that, consider these three principals that shed light on the topic and clarify some of the issues involved:
 
1.  Level of owner’s involvement: The seller may claim the offering is a terrific business opportunity with wonderful potential, but if his or her full-time participation is necessary to make the company run, it looks a lot like a “job.”
 
Being tied to the kitchen, or office, or retail counter for much of the day, during business hours, is pretty much the same experience whether you own a business or labor in someone else’s company. It’s nice to think: “this is my business, I can do whatever I want.” But the reality is that the person who has left a job for a business that’s just as demanding of daily attention may not have made much career progress–may have bought a job.
 
2. Return on investment in absentee business: The entrepreneur who’ s invested money, but not long hours of labor into a company might argue that he or she has a business rather than a job. In fact, there are a number of enterprises in which the investors have a financial interest but little or no involvement in operations. And indeed, that enterprise might well be a business for purposes of this discussion.
 
But there’s a question concerning return on the buyer’s investment. If there are little or no owner’s discretionary earnings at the end of the year, the enterprise, though technically a “business,” is not a very good business. The way for the owner to generate some cash flow is to show up for work every day, replacing employees and taking, as an income, the money saved by reducing staff. Now we’re back to the fact that the person has bought a job because the owner’s intense involvement is required if the business is to generate a return.
 
3. Change in value: A critical factor to be considered is whether the buyer is able to realize an increased value for the business opportunity investment, whether or not involved as a full-time worker. That means the person laboring in say, a retail or service business, and taking out a salary, might actually not be merely the owner of a “job.” An increase in the value of the enterprise, by 10 percent or more after a year or two following the purchase, can be considered proof that it’s a business, rather than a job.
 
Frequently, the difference can have more to do with the intent and action of the buyer than character of the business. An entrepreneur might have purchased a job in which he or she is working every day for an income. But if the owner is working “on” the business, not just working “in” the business, the result often is an expansion of markets, new products, additional locations or other payoff due to implementation of smart growth strategies.
 
A growing enterprise is, for purposes of this analysis, a “business” rather than a “job” even if the owner is earning his or her “living” as a full-time worker in the company.
 
Understanding these principles is useful for a buyer who’s considering whether to purchase a business opportunity or a job, and wants to know the difference.
 
About The Author:  Peter Siegel is a SCORE Counselor specializing in consulting those selling or buying a small business.  He is the Founder of BizBen.com – Businesses For Sale In California and has written three books on how to buy & sell small businesses. If you have questions about the buying or selling a business process please feel free to phone Peter Siegel at: 866-270-6278.

Knowing how to buy businesses headed for success includes an understanding of which industries have a bright future in this fast changing economic and social environment.

Most buyers know to avoid companies such as a photo film processor, a vendor with candy bar machines in school lunchrooms, or a printer specializing in street maps.

But other trends deserve attention. Review these tips to keep you on the right track as you consider what kind of business to purchase.

1. Green companies–Ignore politically motivated cynics who claim our economy will remain fully dependent on petroleum, and on habits of the “throw-away” consumer for the foreseeable future. A recycling company, a firm that installs solar panels or one that converts auto engines to run on used cooking oil are businesses that ought to have a profitable present and future.

2. Serving seniors– The population bubble of baby boomers reaching the senior years means billions being spent on products and services specific for this market. And there is a broad range of businesses in this category, from care centers and at-home services to educational programs, travel and tour enterprises and, if you have the proper training, health facilities.

3. Personal services — Not only does the economy’s personal services sector offer numerous and varied opportunities, it also has this advantage: competitors can’t undercut you on price by outsourcing. Companies offering massage therapy, beauty services, computer technical support, laundry, house cleaning, childcare and the many other functions on which people rely to manage their busy lives, command a significant dollar share of the economy. For many entrepreneurs planning to buy businesses, the search should involve a close look at this sector.

4. Catering to limited budgets–Whether it’s a dollar store, recycled clothing boutique or services for the DYI customer, companies marketing to budget-conscious consumers have a good future. Even in a rapid economic recovery, it will take a long time for most of the currently unemployed to get absorbed into the work force. It’ll take even longer for people with average financial resources–nearly all of us–to start overspending again.

In the meantime, expect growth for companies catering to the budget conscious, and a desirable category for many business buyers.

5. Work-at-home opportunities–Searching for a worthy investment among Internet-based enterprises and other businesses you can operate from your kitchen table is like crossing a minefield to get to an oasis.

Yes, work-at-home opportunities are very appealing, but many offerings in this category are not worth anywhere near their asking prices. Sellers often promote companies that have yet to earn a dollar although based on what seem like good business plans.

When looking to buy businesses that can be run from home, seek those with a documented history of solid earnings, a base of customers, and a product or service to sell that has proved to be popular.

6. Buy local enterprises–The desire to support merchants near home rather than add to the profits of big chain stores, and to avoid imported merchandise of questionable quality, and to discourage the energy-burning practice of shipping goods to your table from across the globe–these consumer motivations are contributing to a growing trend of buying from local merchants. Business buyers interested in retail companies for sale are smart to search for those with a strong following in their neighborhoods. As customers realize the benefit to their cities and towns of keeping their money in local circulation, many retail merchants rooted on Main Street, rather than Wall Street, will have the opportunity to take back some of the market share they had been losing to the big box operators.

The successful plan to buy businesses should include, along with choosing competent advisors and conducting careful due diligence, the tactic of focusing on industries well positioned for 2010 and beyond.

About The Author:  Peter Siegel is a SCORE Counselor specializing in consulting those selling or buying a small business.  He is the Founder of BizBen.com – Businesses For Sale In California and has written three books on how to buy & sell small businesses. If you have questions about the buying or selling a business process please feel free to phone Peter Siegel at: 866-270-6278.

Any owner interested in selling a small business in 2010 needs to understand that success requires adapting to dramatic changes in the marketplace.

The economic picture is dramatically different today than it was say, 20 months ago when profits were up and business loans were easy to obtain.

The hopeful seller should learn at least six important principals for selling a business in order to become an ex-owner successfully in this new decade.

1. Create a business plan: A well thought-out plan is imperative when selling a small business at a time when economists have more questions than answers and when so many buyers are troubled by uncertainty. The good plan focuses on steps needed for the company to enjoy improved earnings and profitability. A business that comes with a blueprint for the future is appealing in this marketplace.

2. Activate marketing strategies: Most business owners know they can boost sales by finding ways to do more for existing customers and by finding additional markets in which to compete. But owners also are often reluctant to engage in these actions, knowing the role of salesperson is much harder than simply carrying out the supervisory duties with which they’ve become comfortable. But to “sell” the marketing part of the business plan to prospective buyers, it’s important to demonstrate that it’s being put into action.

3. Begin the makeover: The general inquiry into whether the company is prepared to compete effectively in the current marketplace is explained by specific questions about use of the Internet and social media for marketing and customer relations management. An organization doesn’t have to be in a high-tech or media industry to benefit from these tools and methods. And most companies that don’t make the effort to establish a modernized presence for the new decade are at a disadvantage. An important move for a seller is to begin the work needed to position the business for the present.

4. Renegotiate with vendors, even employees: A lease that is about to expire, a vendor who seeks new commitments, even workers willing to change the terms of their employment to keep their jobs–these all are opportunities to renegotiate. The smart owner, noticing the economy’s negative impact on the business, doesn’t let the business absorb all of that impact, but goes back to the bargaining table with those to whom she writes checks. The leverage, of course, is the ability of a business in this economy to find better deals by working with other landowners, vendors and workers. Lowering costs can do wonders for the bottom line, which, of course, boosts the appeal of the business.

5. Be willing to help finance: Owners who were selling a small business during the lending frenzy preceding today’s tight money problems might reasonably have expected to cash out. It’s not that long ago when banks were lending and business buyers were using their substantial home equity to help secure purchase money loans. Today, the funding source has all but dried up. Sellers who want a deal and at their price, almost invariably need to help finance.

6. Become familiar with earnout methods: When the seller “knows” the business will regain former profitability as soon as the economy improves, he wants to sell for what the business was worth–what he claims it will be worth again. Meanwhile, buyers consider the company’s performance just yesterday to be ancient history. This pricing gap sometimes can be bridged with a formula that adjusts the price of the business through the mechanism of buyer’s payments, based on earnings for a specific period after close. A seller using this strategy can accept the buyer’s price with knowledge that if and when business improves the price will climb.

It’s not impossible to succeed at selling a small business in this environment, just very challenging. Chances are improved considerably for the seller who employs these six tactics.

About The Author:  Peter Siegel is a SCORE Counselor specializing in consulting those selling or buying a small business.  He is the Founder of BizBen.com – Businesses For Sale In California and has written three books on how to buy & sell small businesses. If you have questions about the buying or selling a business process please feel free to phone Peter Siegel at: 866-270-6278.

The rules for how to buy a business have changed, reflecting changes in the ways business is being conducted. The buyer who wants to be successful in this environment needs to understand at least six key principles.

1. Negotiating with landlords and other vendors: It’s no longer necessary for a business buyer to accept whatever terms the landlord wants to dictate for a new lease, or to keep buying at the same price and terms from suppliers of products and services. The supply/demand balance has shifted in favor of the tenant and the small business customer in many markets. The smart business buyer includes a contingency in the offer regarding satisfactory agreements with all vendors.

2. Knowing what to buy: It’s no secret that companies polluting the air are bound for trouble, or that businesses positioned to profit from the ecological movement are worth considering. The challenge is to learn enough about emerging industries and market trends to anticipate more subtle changes taking place in the economy. Because that change is happening so rapidly, the smart business buyer makes sure to become educated about, for example, the “buy-local” trend and the use of social media to monitor evolving customer needs and attitudes.

3. Calculating the cost of transforming the business to succeed in the future: The asking price might be a fair sum to pay for the company as it conducted business up until 2010. But today’s strategy for how to buy a business must include a determination of the cost to equip the company to compete in the future. That means a website able to effectively manage customer relations. And it means a social media presence that helps build the brand.

The cost of transformation is part of the investment in a business and should be considered when calculating the company’s value.

4. Using seller financing: Many sellers were able to “cash out” when plenty of money was available from lenders and when buyers had ample home equity to help collateralize their loans. In today’s marketplace however, any business seller motivated to achieve a deal, and at a fair price, must be willing to carry back part of that sum. The savvy buyer insists on seller assistance to fund the transaction.

5. Buying with an earnout: An entrepreneur who understands how to buy a business expects to pay what the company is worth today. That can result in a negotiating impasse when the seller wants a price that reflects the company’s more profitable performance when the economy was more robust. A strategy to meet the needs of both parties is an earnout. It allows the buyer to make payments calculated on the basis of current value. But if the business climate improves and the company rebounds to prior levels of sales and profits, those payments will be increased, resulting in a higher price for the business. The smart buyer is ready to engage in an earnout program to acquire a desirable business at a fair price.

6. Getting “real” about inventory value: Business buyers usually have accepted the seller’s figures when it came time to purchase inventory of merchandise for resale, as well as other inventory items such as supplies and spare parts for company equipment. But today’s careful business purchaser wants to make sure that everything he or she pays for is priced correctly and has value in operating the business. This might mean, for example, that some of that old merchandise is not bought outright, but is taken on consignment and paid for only when sold.

Understanding these principles is important for any entrepreneur who wants to know how to buy a business for sale successfully in the current economic and social climate.

About The Author:  Peter Siegel is a SCORE Counselor specializing in consulting those who want to know how to sell or how to buy a business.  He is the Founder of BizBen.com – Businesses For Sale In California, and has written three books on how to buy & sell small businesses. If you have questions about the buying or selling a business process please feel free to phone Peter Siegel at: 866-270-6278.