Ace Chapman joins us to explain how to buy a business. Something he’s been doing for sixteen years and it’s made him a millionaire.
Ace was on the usual college path when the opportunity to buy a business fell into his lap. He was playing with an online stock simulator that crashed a lot and found the company unresponsive. He reached out with an offer to help, merely hoping for an internship.
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Instead, he was offered the chance to buy the business for $70,000. Ace had just $3,000. What he also had was no idea how such transactions usually work so he asked if the sellers would finance half of the deal. They agreed! Ace got some money from a similarly entrepreneurial minded friend and financed the rest of credit cards.
Ace grew the product from 10,000 members to 250,000. He turned down seven-figure offers to sell but lost it all in the first dot-com bust. But he had a school of hard knocks bestowed MBA and decided to buy businesses was what he wanted to do.
Ace had a big advantage when he bought that first business; he had been a long time user of the product so he knew it well. He had spoken to many of its other customers to find out what they did and did not like about the product. It’s not a requirement but it will certainly give you a leg up when it comes time to take over running the business.
Why Are They Selling?
If this business is so great, why are the owners looking to get out? It could be one of a million reasons; a divorce, failing health, boredom and the desire to move onto the next thing. As the Boomers start thinking of retirement, there will be a lot of established businesses on the market.
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Don’t Start From Scratch
Many people don’t really give much thought to buying an already existing business. Starting your own business is something that is woven into the American Dream and we all think we could be the next Bill Gates.
But the stark truth is that about half of new businesses fail within five years. So why not let someone else do the hard work and pour in the capital that the early years of a new business require?
Where To Find An Opportunity
You aren’t very likely to walk into a business and see a for sale sign in the window. There are some sites that have listings like bizbuysell, but the large majority of businesses for sale don’t advertise that way. You can advertise though, that you’re looking for a business to buy. Let them come to you.
So you have to hunt around for something to buy. Because some businesses are sold due to things like death and divorce, attorneys who handle divorces and estates are a good resource to find an opportunity. The sellers in these situations may be highly motivated which can net you a bargain.
Attend events related to the industry you’re interested in, meetups, conferences, seminars and use them as an opportunity to network. The pay off may not be immediate; Ace once bought a business that he had sent a letter to the owners of four years after he sent it. But the owners kept the letter and when they were ready to sell, Ace is the person they called. The lesson is to have a long-term view.
The formula Ace uses when deciding what a business is worth is to multiply the net monthly earnings by two. He likes to employee opportunistic due diligence to find a way to buy at two times but within a few months, increases the revenue by four times.
There are a few things to look for that can make this possible, the business has a hidden asset, a unique opportunity or can be part of a joint venture with someone else in his network of clients.
Face Of Business
What if the business you’re interested in is heavily branded with the image of the current owner? For some customers, if the owner is gone, so is their patronage. Thomas is the College Info Geek. His face is all over the site. If he left, would the site be the same?
You might indeed lose some customers but you can take steps to mitigate the losses. You can agree that the owner gives you permission to continue using their image during the transition, ask them to directly address customers as to their reasons for selling, and even keep them on as an employee or consultant for a time. Some owners love their business and might like to continue to be involved, just without the day to day responsibility that comes with being the owner.
Day To Day
You have to decide how you want to grow things. Do you want to be largely uninvolved day to day, not running the register, not talking to customers, but grow things by buying a few small businesses that you then oversee; or do you want to really roll up your sleeves and do the dirty work needed to grow a single business?
Both are a lot of work but require different skill sets. Are you great at researching and due diligence to identify a great opportunity to buy several businesses? Or are you a marketing guru who can get to know one particular business front and back and can grow it accordingly? Know what your skills are so you can make the best decision.
Anyone Can Do It?
It sounds easy, buy an already established business, enjoys a seamless transition and watches the profits roll in. But like much in life, it isn’t that simple. You can make it easier though. Take into account what you bring to the table and do those things match the business you want to buy.
If you want to buy an owner run restaurant, are you prepared to run the front of house, greeting customers like old friends the way the previous owner did? Or are you an introvert who can’t fathom back slapping and handshaking? If so, perhaps that particular restaurant is not for you. The gregarious owner was an integral part of the success. Hard to replace even if you are an extrovert but impossible if you’re going to be hiding in the kitchen.
Selling Your Business
When evaluating your business, look at it from the buyer’s perspective. Start removing yourself as much as possible from the business. If you’re the name and face, start transitioning away from that. If you’re the go-to person for everything, start putting systems in place so things can run independent of you, start delegating to your employees.
Organize the standard operating procedures for all of your systems. Be able to address the buyer’s biggest fears. If a key manager leaves, what skills would you need to look for in a candidate to replace them? What marketing campaigns have been successful in the past and what has failed? The more fears you can put to rest, the more attractive your business will look when compared to the competition.
If you want to own a business, consider buying an existing one. It will be less work and less risk.
Ace Chapman: Ace’s site on buying a business.
LMM Community: Join the money revolution.