More often than not when young people think about entrepreneurship, they assume they have to go out and start a new business. Why not buy one instead? Think you're not ready to do that? Don't have enough money? Think no one will sell to you? Think again...
There are approximately 80 million baby boomers in the U.S. born between 1946 and 1962. Virtually all of those people will be retiring over the next 5 to 15 years. Many of them own businesses that will transition to new owners.
Let’s look closer at the numbers. There are approximately 25 million businesses in the U.S. and 6 million of those have employees. According to the most recent US Census data on business owners (2002), 31% were over the age of 55 and 29% were 45-55. Let’s conservatively assume that 50% of all employer firms will change hands in the next 15 years. That’s 3 million companies in the U.S. that will change owners, not counting the many smaller sole proprietor businesses. 200,000 companies a year will face an ownership transition! Some of those may sell to family members, other companies, or investment groups, but a large majority will be sold to employees or individual buyers.
When a small business owner is ready to retire and doesn’t have family members who want to take over the business, how does he or she find a buyer? First, they often look at their employees. Is there someone already there who is capable and interested in buying the business, and most importantly, has shown that they are up for the challenge? If owners can’t find someone internally, then they often work through business brokers to find buyers.
If you’re in your 20’s and want to buy a business, one strategy is to find a company you like with an owner close to retirement, get a job there, take on leadership responsibilities and over time make yourself a valued and trusted employee. Make sure the owner knows that you have aspirations to own a business some day. When the owner decides it’s time to sell, you’ll be one of the first people they think of. The other option, albeit a little more difficult, is to work with business brokers. Of course they’ll want to first make sure that you have the financial resources before they’ll work with you.
Do you think banks won’t lend money to you to buy a business when you’re young? You’re probably right, unless you have a rich uncle who steps up to co-sign a note and provide collateral. If you don’t have a lot of capital, does that mean you can’t afford to buy a business? Absolutely not. A majority of small business transactions include a significant portion of owner-financing. This is particularly true of small retail and service businesses that might sell for $50,000 up to $500,000 or so. In fact, you may not have to engage a bank at all. This is where that personal relationship between you and the owner(s) becomes very important. If they believe in you and trust that you can take care of their baby that they’ve helped grow over the last 10, 20, 30 years, then they’ll look for ways to do a deal with you. Yes, you’ll probably have to come up with some cash as part of the deal, but you can likely structure most of the financing through a multi-year loan from the seller. There might also be an earn-out piece that bases part of the selling price on the future performance of the company.
So how does this work? Assume you’ve found a business you’d like to buy for $300,000 that generates $120,000 per year free cash flow, after the owner’s salary. Let’s also assume you’ve got a great relationship with the owner, either because you’ve worked there, or you’re a long-time customer or you’ve just hit it off during the negotiation process.
Here’s a relatively simple way this transaction might occur. You offer the seller $30,000 in cash and pay the remaining $270,000 over five years at 6% annual interest. That means your monthly payments would be $5,220. Where does that money come from? The cash flow from the business! Remember, each month that business is generating $10,000 or so in free cash flow. For the first five years you own the business, you’ll pay the owner $62,640 annually in principal and interest. Is this a good deal for the owner? Sure it is. They’re earning 6% on their money (try to find that kind of deal in a CD at your local bank!) and worse case if you don’t make the payments, they can take back the business. Is it a good deal for you? Yes again. Assuming the business doesn’t tank, you’ve got enough cushion to make those payments and still have some profits. Plus, the seller still has a vested interest in seeing you succeed. After five years, or sooner if you pay the note off early, you own the business free and clear.
So yes you can buy a business when you’re young. You’ve still got to come up with some cash, but hey, isn’t that what friends and families are for? There will be tremendous opportunities over the next decade. It’s not easy, but if do your homework, find the right business and work hard, that dream business can be yours.
No comments:
Post a Comment