Shark Tank Jump Start Your Business: How to Launch and Grow a Business from Concept to Cash (5 page)

If starting your own company doesn’t appeal to you, there are still other ways to be a small business owner. Many choose to purchase a company that’s already up and running.

Depending on your particular circumstance, purchasing a business, as opposed to starting one from scratch, can actually be the better option. For one, there’s generally less risk
involved in buying a business. Think about it: if you purchase a business for $100,000 that has an annual cash flow of $20,000, there’s a high probability that you’ll recoup your initial investment and begin making a profit in a reasonable time frame. And that’s without making any improvements.

Even if you only spend a third of that capital to launch a startup, the likelihood of it being lucrative from the start is slim. Many entrepreneurs are unable to take a salary for the first few years. And for those who do, the size of that salary is less impressive than you might think.
It’s estimated that a small business owner with less than one year of experience will earn as little as $34,000 a year.
By purchasing a business that’s already making money, you greatly decrease your overall risk of failure.

Another benefit of buying a business is that you acquire basic infrastructure. A business that’s already operational comes with customers, employees, best practices, technology, and other necessities that could take years to develop from the ground up. Add that to the brand loyalty and legacy you’ll inherit, and you have the makings of what could be a fantastic business. If you purchase the right company, your main focus will be on improvement, not development. That alone can save you an abundance of time, money, and headache.

Purchasing a business, however, isn’t as easy as it may sound. Although you may not be starting something from scratch, you should invest the same level of care and consideration in the evaluation process. When looking to buy a potential business, here are six questions to consider:

If you’re going through the complicated and risky process of purchasing a company, you want to make sure it has real
growth potential. Explore not only the business, but the industry as well. Try to identify any market trends that indicate where your business may be headed. ACTION ITEM: Do a comprehensive online search for any information related to the industry. Read articles, find experts, follow fellow entrepreneurs on Twitter.

You probably have a good idea of the company’s strengths. Why else would you consider buying it? But having a clear understanding of its weaknesses is sometimes even more valuable. As the new owner, you will be the one responsible not only for recognizing the challenges that lie ahead, but for coming up with solutions as well. ACTION ITEM: Anonymously chat with the competition about the business or ask to speak directly with current customers. Don’t hold back when having these conversations. You want the most accurate feedback possible.

There’s more to a business than just its current (and potential) financial state. What kind of reputation does it have? What role does it play in the community? Make sure there aren’t any unpleasant surprises that could affect your ability to succeed. ACTION ITEM: Review sites like Yelp that give access to real customer feedback. If possible, chat with current and past employees to get their take on the business you’re thinking of purchasing.

Maybe the company is growing too fast for the current owner to handle. Perhaps the founder is ready to retire. Whatever the
reason, you’ll want to know exactly why the company is being sold. Be sure to ask this question a few times throughout the process and make sure the story holds up. The more information you can gather, the better off you’ll be. ACTION ITEM: Don’t just talk to management; try to engage the staff as well. If you’re thinking about purchasing a retail business, it may also be a good idea to chat with the business’s neighbors. Word travels fast, and they may know more than you think.

Even if this information is laid out in the business plan, be sure to have a detailed conversation (or two) with the current owner about the competitive landscape. Who are the company’s main competitors? Where are they located? How long have they been around? Look beyond the current competition and explore any potential future challenges as well. If a big competitor is slated to come to town in the near future, for instance, you may be less inclined to purchase the business. ACTION ITEM: Acting as a customer, anonymously reach out to any major competitors and inquire if they’re planning to open a new location near you anytime soon.

This is perhaps the most crucial question of them all. Are you the best person to own this business? Do you have the right combination of skills and talents to maintain and grow the operation? Even if the company seems poised for greatness, you should only purchase a business if you feel certain you can add considerable value to the operation. Answering this question honestly from the start will save you tremendous pain and anguish later. ACTION ITEM: Thoroughly review the list of strengths and weaknesses you created in the
previous chapter and make sure they align with your role in the business.

Purchasing a business is a complicated process, and you’ll eventually need to hire a team to perform the proper due diligence. This process begins when the buyer and seller sign a letter of intent. From there, the potential buyer has sixty to ninety days to uncover any unsavory information that may be lurking in the background. The due diligence process usually contains three parts—operational, financial, and legal—and should be performed by a lawyer and accountant who specialize in the process. You’ll want to hire the very best team you can afford. This is not the place to cut corners.

Although buying a business can have less financial risk in the long term, it generally requires substantial capital at the start. While banks are usually more inclined to give loans to businesses with cash flow, more than likely you’ll be taking on a significant debt. Make sure you have all the necessary information before making such a hefty commitment.

If you’d rather not take on the risk of starting a new business and you’re uninterested or unable to purchase one, opening a
franchise may be the right decision for you.
A franchise is “a business system in which private entrepreneurs purchase the rights to open and run a location of a larger company.”
Think about a local fast-food restaurant, gym, or hotel chain. It’s likely all of those are franchises.

When purchasing a franchise, the business owner (also know as the franchisee) signs a contract with the parent company, in which he agrees to an elaborate set of rules and procedures that must be followed. While some may take pleasure in such a rigid structure, many entrepreneurs hate the idea of being kept on a tight leash.

Before deciding whether purchasing a franchise is the right move, you should know the pros and cons that come with owning this type of business.

Pro:
You’re not only buying the business, you’re buying the business model as well. For many startups, finding a viable business model can be challenging. By tapping into a proven model, you could have a better chance of success.

Con:
Having to follow a specific model limits your ability to control your business. If you come up with a fantastic new idea that’s outside the boundaries of the particular model, you may not be allowed to see it through.

Pro:
In theory, the collective bargaining power of the parent company allows the franchisee to save money on inventory.

Con:
The less control you have over inventory, the less control you have over your finances. There’s often speculation that franchisors receive kickbacks from suppliers, which means you may become subject to inflated prices.

Pro:
When a franchise is being purchased, the parent company will generally provide the franchisee with a good estimation of the startup costs. This allows you to budget properly from the start.

Con:
Along with the regular expenses incurred when starting a new business, most franchisors require a nonrefundable initial startup fee that can range from thousands to hundreds of thousands of dollars. These expenses can put the business deep in debt before it even opens.

Pro:
When business owners tap into a turnkey operation, one that requires little to no additional work from the buyer, it’s assumed that they will begin bringing in cash relatively quickly.

Con:
Many franchisors take royalty fees each month, along with requiring business owners to contribute to an advertising fund—even if the advertising doesn’t directly affect their particular franchise. Moreover, some franchisors require credit card processing to be done through their system, meaning the franchisee must wait longer than usual to receive her money. Regular expenses like this can dramatically hurt a franchisee’s cash flow.

Pro:
An established brand can increase a company’s ability to stand out from the competition and acquire new customers, making the business more profitable.

Con:
When the parent company does something unfavorable, it has the potential to affect the franchise too. Take BP, for instance, whose Gulf oil spill significantly affected their franchisees’ business.

Owning a franchise requires a lot of work, but it’s definitely the most “plug and play” option for starting a business. Keep in mind, however, that it may not be the best fit for a person who craves freedom. If the franchisee steps just a little out of bounds, it can cause the parent company to terminate the agreement on a moment’s notice. And since most franchisees are forced to sign away the ability to seek legal recourse, the business owner could lose his entire investment.

While this book is designed to help all entrepreneurs jump start their respective businesses, it’s important to note that some of the information found in these pages may not be applicable to franchise owners. Most franchises come with stringent operating agreements that affect everything from accounting and marketing to suppliers and customer acquisition. You may find that your franchise contract goes against some of the advice provided in this book. If so, void this information and follow the rules laid out in your agreement. Otherwise, you may not have a business at all.