Buy a Business

 

A business of your own.

We have all experienced that day of frustration. The day that some office associate quits or an email gets misplaced; we suddenly realize that we would rather be anywhere else that continuing to work at a job that is no longer satisfactory. This is the day when we recognize that we should go into business ourselves.

The dream of owning one’s own business is not for the meek. The first big decision is whether or not to purchase an existing business or to start from the ground up. Unfortunately, the odds are stacked against start-up companies and the clock begins ticking the minute the first payment is due to the landlord or lending institution. There are many reasons that new businesses fail ranging from poor location, product/service mix, lack of marketing, under capitalization, or poor planning. Whatever the reason, with 60% of new businesses failing in the first 3 years, many small business owners are choosing to try to acquire an established business.

Buying an established business provides the two essentials to success: proven location and the right product/service mix. When those tow ingredients are in the batter, the cake is usually served atop a positive cash flow. For those of us who don’t cook-or even like cooking metaphors- cash flow is the business’ discretionary cash or the money that the business owner takes home after paying the debt. Consider the following example:

Sales Price $100,000
1/3 Down $33,000
Mo. Cash Flow $4,000
25% for Debt Service ($1,000)
Monthly Cash Flow $3,000
x 12
Annual Net $36,000
The down payment buys the new owner into the business while the monthly cash flow retires the debt and pays the costs for the business.

 

If a buyer can buy a business for the amount that they have to put down and it will still earn the desired profit THAT is what the business is worth to a buyer! It is also the biggest reason that it makes more sense to buy an established business.

 

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