How do I buy a business? I have an opportunity, but not a f*cking clue.

February 3, 2013 9:00 AM

Hi, metafilter. Been a long time. I find myself in a very weird position, because I have a potential chance to buy a business that already has a very successful foothold in my industry. The weird position comes from not having a single clue as to where to start.

Without bleeding any of the details, basically it's like this:

* I have an opportunity to buy a very successful business in my industry.
* I have no idea as to where to start looking for things like financing, due diligence, etc.
* I will take over as the master craftsman/artist at this business.
* The business is currently doing almost $1,000,000 a year in profit.
* I would be the future of this business.
* This business would be my future.

Can anyone point me into the right direction? Pretty please? I know I can rock this if I get the chance; I just don't know where to start with anything regarding financing, or any of it.

posted by Jim On Light to work & money (13 answers total)

I'm pretty sure this is the kind of question that the answer "lawyer up" was made for.
posted by Alterscape at 9:04 AM on February 3

Put together a team to evaluate the business:
Lawyer
Accountant/CPA

You need to do two things at the very basic level:

1) evaluate the business objectively to put a realistic valuation on the business to make an offer (financial statements, contracts in place, customer relationships, assets owned/etc)
2) gather information to get financing from a bank/etc, which will require all the data in step 1 assembled in to a business plan/etc.
posted by iamabot at 9:08 AM on February 3

Get a third party to establish a valuation on the business. That would not be a run-of-the-mill accountant or banker, but someone who does this sort of thing for a living. Ask you plain-vanilla lawyer/accountant/business broker for referrals.

You'll be looking more than tangible goods minus debt. There's also value in intellectual property like trademarks, copyrights and customer lists. Does the business have a steady stream of regular clients? Another formula is to take the annual cash flow and divide it by a rate similar to the rate of return. If the type of business is common enough, also find out what similar businesses have sold for in your area.

Another factor is how anxious the seller is to get out. The more anxious, the better for you.
posted by Longtime Listener at 9:29 AM on February 3

When you say "profit" do you in fact mean "revenue" ?
posted by canoehead at 9:34 AM on February 3 [1 favorite]

I would first explore the idea of "owning and running a business" to see if you really feel it is a fit with your self. Excellent artists and craftsman are often totally unsuited to the business of running a business. Are you willing to take on all of the demands of paperwork and management and let loose of some of the creative, hands-on functioning?

Your university system probably has some type of consulting available, or a retired businessperson organization, such as SCORE or the local equivalent, which can give you a probably more appropriate initial overview about buying and running an existing business than a CPA or an attorney, who will both be essential to the actual process.

Good luck! Skill-based businesses are fantastic.
posted by uncaken at 9:36 AM on February 3

@canoehead: no, I in fact mean above revenue. Cleared profit.
posted by Jim On Light at 9:50 AM on February 3

Apart from the logistics of buying the company, find out why they they have been successful in the past and if these conditions will continue in the future. The company could have been delivering a product without a lot of competition. If now the competition is around the corner this might be a good reason to sell. To answer your question: talk (and maybe record) with everybody you can find in the company, on all levels and also look at the type of cars in the parking lot.
posted by Eltulipan at 9:55 AM on February 3 [1 favorite]

I will take over as the master craftsman/artist at this business.

How much of the success of the business was/is tied to the reputation/personality/skills of the current master craftsman/arts at t his business?
posted by anastasiav at 9:59 AM on February 3 [2 favorites]

I will take over as the master craftsman/artist at this business.

For some types of business (mechanic, hairdresser, SEO engineer) the owner IS the business. What they are selling you a client list that may or may not continue to contract with you. How will your business fair if one of the co-workers or the former owner decided to set up shop - are they are risk to your business because they will also have access to their prior working relationships? Meet with the clients if possible and find out what made them choose this company over another and see if you will be able to replicate those reasons.

I thought a very rough guideline as to the cost of a business was 3-5 the annual profit in the last year, so in your case that would be $3-5 million dollars. Does that figure fit well with you? (There is a huge amount of variables in that number so take it with a HUGE grain of salt). Is there a large amount of assets included in the price, what about any liabilities like on-going contracts - like for rental space, are you happy with those conditions? Is the insurance easy to get or will that be an unexpected expense? What about HR obligations (payroll and taxes). If the current owner wants less I would wonder why they are walking away from that amount of annual profit instead of restructuring the business to hire/train others for the actual work for a good (but less than a million dollars) salary.
posted by saucysault at 10:10 AM on February 3

Get a lawyer experienced in these things. This is a major purchase. Then start hitting up banks etc. Your local town and or state likely has some sort of small business development center. who can likely point you in the right direction.

Note this is going to be expensive a business clearing 1M a year (is this number growing year over year? How Quickly?) is going to be likely at least 5M in purchase price if not more if its growing quickly. The business or yourself better have solid assets to finance this type of purchase.
posted by bitdamaged at 11:28 AM on February 3

@anastaslav:
How much of the success of the business was/is tied to the reputation/personality/skills of the current master craftsman/arts at t his business?

Every single bit of it. However, I am pretty sure I can get the original owner to stand on at least as my consultant. I also have a good reputation in this industry, and the melding of the two personalities will be outstanding. At least that's the hope.

The thing I worry about the most is my past personal credit history. After graduate school about a decade ago, I incurred some debt from marriage. It's all been paid down now, but is this something I should concern myself about?
posted by Jim On Light at 3:37 PM on February 3

How much of the success of the business was/is tied to the reputation/personality/skills of the current master craftsman/arts at t his business?

Every single bit of it. However, I am pretty sure I can get the original owner to stand on at least as my consultant. I also have a good reputation in this industry, and the melding of the two personalities will be outstanding. At least that's the hope.

My first thought is - if it's legal in your jurisdiction, make sure the owner signs a non-compete as part of the purchase. I'm not a lawyer, but I believe in most places a non-compete is only enforceable if there are both reasonable distance restrictions and reasonable time limits. So saying "you can't ever re-enter this industry in the US" wouldn't fly, but "you can't re-enter this industry within 75 miles and/or within 5 years" might be OK. If your primary sales method is online, then maybe "you can't re-enter this industry with online sales for at least 5 years" or something.

You say you might be able to talk the owner into staying on as a consultant - but what happens when s/he doesn't like some of your business decisions? Or realizes they miss truly being in charge? People say all the time that they want out of business ownership, only to turn around and jump back in.
posted by trivia genius at 7:33 PM on February 3

Look at it this way as well: all of the people on the client list are going to look for a replacement craftsman soon if you do NOT buy this company. How many of these would you be able to pick up by just starting your own business and making sure you can be found (on google etc)?
posted by DreamerFi at 8:11 AM on February 4