Why & How: I Bought My Business During the Last Recession

July 22, 2020

 

With the economic disruption that has unfolded in 2020, serious employment migration is not only expected but is already happening. Executives and sr. professionals will be faced with the same questions I faced back in 2008. 

 

Instead of going through the courting ritual of finding a new job, I started a business and bought another.  In today’s climate, I think it’s an opportune time to buy your’s. Here is why.

 

 

If you are ready to take more control of your future,  this is how you find a business to own.

 

  1. Determine

  2. Decide 

  3. Discuss 

  4. Develop

  5. Go shopping

 

 

Determine: How Much Can I Spend

I would look at businesses that are valued at five times the cash I have in hand.  So, if you have $300,000 to invest, you should be looking at businesses advertised at $1,500,000.  Now most businesses are priced at the top of their value range, so in this scenario, you should look for businesses in the $1.2M to $2M range.

 

If the price is not disclosed, look to cash flow. Most individuals pay between 2.5x and 5x cash flow for a business.  That means, if you have $300,000 to invest, you should be looking for companies generating cash flow between $250,000 and $800,000.

 

If most of your cash is tied up in 401K or IRA retirement funds, you can access those funds for your down payment using a method known as ROBS (Roll-Overs for  Business  Start-ups)  The process is exacting and it will take some time but is used regularly by those acquiring businesses.  I recommend to start early and use a professional.

 

 

Decide: What Type of Business Should I Buy

What drives you?  Remember that owning a business is bigger than a job.  It becomes a part of you and your world for a long time.  Do something you enjoy.

 

Do you have the experience? Cooking Sunday supper is much different than running a restaurant.  Take a hard look at your skills and how they would translate to owning a business.  You will need to convince a banker, so be prepared to sell yourself and your vision.

 

What is available? A great way to come up with ideas is by seeing what is available. Go window shopping using one of the major websites like BizBuySell, DealStream or BizNexus to survey the landscape of businesses available in your area and price range.  Don’t dig deep, just start with a few to gain an understanding of what's available.

 

 

Discuss: Seek 2nd Opinion

This is a a full commitment. Once you have narrowed your options, you need to have a serious conversation with your inner circle. Whether that be your family, friends, colleagues or advisors -  you should not make this decision alone. Different perspectives can help clarify or foresee opportunity and/or adversity.

 

Buying a business will have a significant impact on your lifestyle. At times, it will require your complete and devout attention. It doesn’t have to be your passion, but you must be passionate about the success of the company. 

 

 

Develop: Finding a Lending Partner

The Small Business Administration (SBA) is the primary lender when acquiring businesses. They have set parameters for down payments at 10% of the total transaction cost.

 

Go to SBA.gov and learn as much as you can about the SBA 7a and 504 lending programs.  These will be the programs you will most likely use to acquire a business. Get a list of SBA approved lenders in your area. If you have friends in the business community, call around about the reputation of these lenders.  Alternatively, call a few business brokers in your area to see who they like to use.

 

Remember that you will be potentially working with this banker for 10 years or more. Meet with three or four of your top choices and have an open conversation.  Get their feedback and listen to them. A good banker will force you to answer hard questions about the business and about yourself.  Your answers will enable you to make a better deal.

 

Once you have selected your top two, ask them to review your credit position and provide you an indication that they would lend you the funds you need.  They can do this with the caveat that the final lending commitment will be based on the health of the business and your credit.

 

 

Time to Go Shopping

Now you are ready to begin a serious search.  Go back to the websites I suggested earlier and find the businesses that meet your criteria. Save everything that peaks your interest but only inquire about a few at first. Starting slow will help you make sound decisions and avoid overwhelming yourself.

 

Most of the businesses you pursue will be represented by a business broker. If you develop a good relationship with a broker, they will help you get your deal done. Be transparent about your goals, your skills and your financial parameters. Most brokers represent multiple clients at a time. If they understand what you are trying to accomplish, they can be much more helpful.  

 

With a clear focus on your future business, your financial resources in place and a methodical plan to find the right business, you are on your way to becoming a business owner.  Welcome.
 

 

 

Chuck Harvey, is the owner of International Business Exchange, Inc., one of the oldest, largest and most respected M&A Advisories in the profession. Prior to IBEX served as CEO, COO and CFO’s of Fortune 500 Companies, thriving middle market companies and start-ups.  His extensive financial experience with the public market, private equity and venture capitalists includes more than three dozen buy-side and sell-side transactions on three continents. He is also the found of Infusiac, LLC and The One 21, LLC.

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Photo: Leap

Photographer: Doctor Popular

Licenses: Attribution 2.0 Generic

 

 

"Texas Real Estate Commission Information About Brokerage Service",

"Texas Real Estate Commission Consumer Protection Notice."

 

 

 

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