East Bay Score Chapter 506 Blog

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.

It’s no surprise that many entrepreneurs want to buy gas station business opportunities.  The industry seems to thrive whether the economy is strong or is ailing. Like a grocery store or energy provider, the gas station supplies something that most everyone needs.

And the connection with a companion business, such as a car wash or convenience store, can return substantial profits to the entrepreneur with a ‘buy gas station business’ strategy. No special knowledge beyond basic business competency is needed to run it efficiently.

But a gas station prospect needs to know this type of business presents specific risks not as closely associated with other businesses. Understanding those risks and how to avoid them can help the entrepreneur enjoy success with a sound gas station buy.

1. Ground contamination is common among petroleum retailers who haven’t upgraded to newer, leak-proof storage tanks. Most communities enforce environmental regulations for gas stations. Any business with petroleum leakage will be force to close down so contaminated soil can be removed and storage facilities improved. Finally, a new station is built on the site. What a problem for a new station owner! 

Anyone seeking to buy gas station business opportunities is advised to insist that any purchase agreement require testing of soil samples, and that results show no contamination.

2. A related issue is condition of the storage tanks. Older steel tanks invariably begin leaking after years of use. Newly installed gas stations and those refurbished are outfitted with double-wall fiberglass tanks (referred to as DWFG in the industry). And the tanks are equipped with leak detection sensors. The presence of these tanks also should be a condition of any offers made to buy gas station businesses.

3. There is a nasty surprise in store for gas station buyers who don’t conduct due diligence about ownership of the property where the business is located. In many cases, even California’s major oil company franchisors have posted their large, familiar signs on property they don’t own. Imagine the distress for owners of name-brand oil company franchises who discover, the hard way, that the franchisor’s rights to the property were “on a short fuse.” A ten year sublease is meaningless if the sublessor–the oil company with the master lease–loses its right to conduct business at the locale.

4. It’s reasonable to expect when making an offer on a gas station that access to the property will continue to be as easy in the future as it was in the past. But what if the local government plans to bulldoze streets adjacent to the station for underground utilities repair or road improvement? Most business offers don’t include a contingency about getting satisfactory information from the city’s planning and development department. But a condition with that requirement ought to be included in any offer to buy gas stations.

5. The possibility of paying too much for an enterprise in this category is a major risk for someone ready to buy gas station business opportunities. It’s a mistake to believe seller or broker claims that the appropriate price is determined by gross sales, or number of gallons pumped every month.

Like any small business, a gas station should be valued on the basis of the seller’s earnings before deductions for interest, taxes, depreciation and amortization. Pump volume or gross revenues may have no relation to earnings, and should not be considered when determining a gas station’s value. The buyer is safe using the earnings multiples applicable to most small businesses.

A gas station offering with appealing features, such as a long-term, market-competitive rental rate, a seller’s willingness to help finance and substantial amount of capital equipment in good condition is likely to be worth about three times average annual earnings over the past three to five years.

The purchaser who has “buy gas station business” on the to-do list, and is considering a company that doesn’t offer these benefits, should consider the right price to be about twice the annual earnings average. And many opportunities in the industry have a value using a multiple somewhere between two and three.

The entrepreneur wanting to buy gas station business opportunities might invest in a company or companies that are very profitable and not too complicated to operate. But the benefits will only accrue to a buyer who is cautious to avoid the risks inherent in purchasing this kind of business.

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.