Help me buy or start a company
December 23, 2009 9:39 AM   Subscribe

Suppose an entrepreneur has 100k to 200k cash. He has some experience launching and marketing a small scale services firm, but has no financial background. He wants to use his 100/200k to start a new business venture.

Is it better to use the 100k as seed money to start something from the ground up, or to get a loan and buy a company of, say, some 500k-700k worth? What kind of company would 500k buy? Am I right to assume that it would buy a company with about 50k profits yearly (10x annual profit?).

What do you look for when buying a new business? What are the pitfalls of starting a second business next to your primary one? Can you show me some good books or blogs or webinars on the subject?
posted by anonymous to Work & Money (6 answers total) 9 users marked this as a favorite
This is a pretty big question - let me try to take a few bite-sized nibbles.

First things first - I would limit yourself to ventures in an industry/industries that *you* know well. This isn't the time for on-the-job training. You need to have a firm grasp of the dynamics of the business. That isn't to say you need to know how to do everything - but you need to know what you know, and what you don't know, and what/who you need to address the issues of what you don't know. Mainly because it's what you don't know that will kill you.

If you're buying another company, you'll never really get a true sense of their financial state until you actually take ownership. Information asymmetry is a challenge, and there's always something you won't find out about until after the fact - it's the same as buying a home and then discovering the roof only has one year left.

You don't want to purchase a business based on their net - profits are something that can be manipulated fairly easily (e.g. defer required maintenance this year, we'll be selling the company anyways). You'd be looking at a multiple of revenue - likely in the 1-3x range, no more. So you'd be looking at a company making ~200-400k/year in revenue. Assume a 10% profit margin, and that's 20-40k/year.

Most entrepreneurs buy existing businesses because they see opportunities to do things better than the existing owners, either by increasing sales or improving efficiencies and reducing costs. Unless you can see how you'd do one, or the other, I'd move on.

I'm going to go back to my holiday shopping now, and let the rest of Green tackle it from here.
posted by swngnmonk at 10:09 AM on December 23, 2009 [3 favorites]

Go shopping. There are business brokers. See what's for sale. Pay attention to the goods and services you use. It's a seriously tough economy; there should be deals.

Quite a few years ago, I bought a business, which I sold after operating it for a number of years. I found business brokers to be uncommonly useless. Businesses are very difficult to price. The tax implications are significant. Accountants vary widely in expertise; I got some really bad advice from a respected CPA, some of which I ignored, to good results. Take the time to really assess the long term market, the profitability, the competition, the assets and especially any hidden liabilities. I worked for a company that bought a business with a significant hidden liability in accrued vacation time. Ouch.

If there's a type of business you're particularly interested in, ask vendors and sales reps. When I sold my business, I put the word out with the sales reps. They know everybody, and it was a successful technique. If there's a business that you're interested in, approach the principals. They may be willing to sell.

There will be a branch of the Small Business Admin. in your area; use them. Go to Chamber of Commerce meetings.
posted by theora55 at 10:28 AM on December 23, 2009 [3 favorites]

I'm not a small business owner! But just remember to compare the cost of buying/starting a business with the lower-risk alternative, which is getting a regular job and investing your 100k-200k in stocks and bonds. When I did this (investigating the possibility of buying a 4-unit apartment building), the numbers came out extremely close.

So I decided to waste all my money on graduate school....
posted by miyabo at 10:32 AM on December 23, 2009 [1 favorite]

It's awfully easy to overestimate your own time and energy, so take care with buying or starting another business on the side of your primary business, especially if you don't have many employees now. If you have employees already, there are other options like starting the new company as a subsidiary of the current company and using the existing support personnel for various jobs in the new company.
posted by jeffburdges at 11:33 AM on December 23, 2009

Been around this block a time or two.

Study the competition first. Spend a lot of time on this. From there see if there are any outward improvements you could implement on day one and run them past anyone willing to give you an opinion.

From there some of the puzzle pieces should fall in place for you. A lot of it is going to be the time you want to invest in this venture based on the things you are already doing. Sort of like planning to have a baby.

Once you make this decision then it is time to break out the calculator.
posted by bkeene12 at 8:27 PM on December 23, 2009

Unfortunately for business what I've found is there's nothing that replaces other than friends or people you meet who have engaged in a similar business. The reason that I imagine for this scenario where a blog doesn't work is that the folks running the business are not writers who have amassed clarity in thinking and writing and communicating such information but are capable enough of thinking with the information they have (i.e. the metrics) and use intuition to make calls.

The difference between an MBA and a entrepreneur according to Reid Hoffman (CEO of linkedin) is that an entrepreneur needs to make decisions and then think about it and then remake the decision if the need arises. However, the MBA consultant think analytically and carefully through strategic issues but in business if you're slow to react then you lose market share and that's obviously tough to gain back. (see the video on or .com - his talk is geared towards startups, 6 part lecture series - short 2-3 minute lectures)

When running a business, ask yourself do you want to do the job of the business or do you want to "run" a business. I would highly recommend reading Jay Goltz's posts on nytimes you're the boss blog especially this post.

Finally, here's where I've discovered a big key towards running a business even though I don't run one. I've observed some people work in the service industry and be innundated with emails, phone calls and used "reactionary" ways of acting versus a proactive approach. What I recommend here is that one use lists or GTD which is something that helps me tremendously that helps me get creative because most of the important stuff is on paper that allows me to think more of the business and the expansion side of it. You want to make the business run for you not you be a slave to the business. At the start there is the ground work undoubtedly whether buying an older company or starting out on your own, but keep it in perspective so that you actually get to let the business run itself as well.

I believe there's also a post by Jay Goltz on the you're the boss blog about what banks look at for getting a loan, it's a particular ratio that i can't remember at 12:05am.

Finally, I would second everything said by swngnmonk.
posted by iNfo.Pump at 9:07 PM on December 23, 2009 [1 favorite]

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