Buying existing ventures puts people in business

So you want to own a business.

You're willing to yield your evenings and weekends to launching a startup, establishing a client base and struggling with low cash flow during your first few months in business.

But there might be a faster path to entrepreneurship: buying an existing company.

Established businesses have entrenched client bases, trained employees, existing marketing programs and proven operational systems. Setting up those components within a startup can take a year or more, and cash flow is often nonexistent while the owners hunt for their first customers and craft processes and policies, said Len Krick, principal broker and managing member of United Business Brokers of Nevada.

What's more, it's tougher to finance a new business than it is to borrow for a going concern. A business owner who's selling his company will sometimes help cover part of the deal, and the U.S. Small Business Administration has lending programs specifically for operations with three to five years of cash flow, Krick said.

Unless you have a detailed business plan and empirical proof that your idea is a guaranteed winner, banks will shy away from funding a new venture, and you'll probably be on the hook for most of the startup capital yourself.

It's often pricier to purchase a company -- a typical business netting $100,000 a year will sell for around $500,000, whereas opening a company could cost around $100,000 -- but you're paying extra for the better odds of survival that accompany a stable practice, said Michael Webster, owner and president of Webster Business Group in Las Vegas.

"You have an established net profit, so you know you're already making money," Webster said. "If you start your own company, you take the chance of not knowing whether you're going to make it."

Business brokers say bars and taverns are especially popular among buyers, including first-time entrepreneurs.

Krick has a waiting list of more than 400 people seeking to buy a tavern.

"We call (taverns and restaurants) 'fantasy businesses,' " said Richard Giannini, vice president of First Choice Business Brokers in Las Vegas. "First-time owners picture themselves running a bar where people come to them, like they're in 'Cheers.' But after doing it for a while, they realize the reality is different, and they usually end up selling that and moving on to something different."

Other popular businesses among first-time buyers include hair salons and dry cleaners, Giannini said. Seasoned business owners are gravitating toward service stations, car-repair garages and construction companies.

Krick's clients are chasing "anything with recurring cash flow" -- companies that provide services consumers will always need, including lawn-maintenance operations. Any manufacturing business is "as good as sold," Krick said, and pizza parlors, ice-cream shops and smoothie stores are also in high demand. United Business Brokers has helped sell at least 15 ice-cream stores and eight Tropical Smoothies stores this year alone.

"Those kinds of businesses are popular because they're 'Main Street' businesses that most people understand," Krick said. "They're not intimidating, and people know how to operate them."

But business brokers urge their clients to think beyond buying a company merely because it belongs to a popular sector or because it's raking in cash.

"I ask clients what the No. 1 attribute they should be looking for in a business is, and they always say, 'Cash flow or return on investment,' " Krick said. "I tell them, 'No, it should be something you can't wait to get out of bed in the morning and go do.' "

Prospective buyers should view a business as a path to the lifestyle they're after, Giannini said. Entrepreneurs who want to spend evenings and weekends with their families, for example, should avoid buying restaurants, because eateries are management-heavy operations that require long days and frequent work after hours.

Choosing a category of business is only the first step. Once a buyer has honed in on the type of company he's interested in, he can expect a fast-paced purchase process.

Sellers generally want to keep word of a potential sale private to prevent employee and client flight, and that means buyers will be looking at blind listings in their initial queries, Giannini said. Buyers will get only the most basic information: the type of business and its approximate location. They won't be able to get addresses and drive past storefronts to scope out specific prospects. Once a buyer has chosen two or three blind listings, he must prove to the listing broker that he's financially able to close the deal.

"It's not like buying a house, where you find something you like and then go get financing," Giannini said. "You have to come here with cash in your pocket."

Once a buyer has verified his finances, he'll sign a confidentiality agreement and then get details on each company, including its address. A meeting with the seller follows, and if the buyer is still interested in the business, he'll make an offer. If the seller accepts the proposal, then the buyer will perform due diligence to ensure all the information he's been given about the company's operations is accurate. The sale closes after that due diligence is complete, though the buyer often has a "unilateral right" to withdraw an offer if due diligence digs up details on questionable practices or shaky finances, Krick said.

The deal's close will depend on such contingencies as reassigning the lease to the new owner, obtaining funding, switching over franchise agreements or acquiring municipal licenses. The buying process can take as little as two or three days, but most transactions close in a few weeks. It can take up to 21/2 years to get a restricted gaming license for a tavern with slot machines, Krick said.

Business brokers advise buyers to become incognito customers of any company they're considering buying.

If it's a restaurant, stop by for a meal. If it's a dry-cleaning business, take some clothes in for service. Watch for signs of low employee morale, poor customer service or unhappy clients. If a company has a bad reputation among consumers, you're better off starting up an operation from scratch, Giannini said.

"There's a bit of buyer beware to purchasing a business," Giannini said. "You're going to need a little bit of savvy."

This story first appeared in the Business Press. Jennifer Robison writes for the Review-Journal's sister publication and can be reached at jrobison@reviewjournal.com or at 380-4512.