Buying an existing business is like a buying used car

My wife used to laugh me at me when the Sunday newspapers were delivered. I would glance through all the sections I liked and then would spend hours looking through classifieds. “What are you buying?” she would ask. She knew the answer was “nothing, I just like to look.” I would mostly look at the used car listings and business opportunities. They seem a like very different purchases, but after you “kick the tires” (pun intended!) they may not be so different after all.

Buying either a used car or an existing business takes a leap of faith. Despite all the tools available to assist you, there are simply certain things you will have to accept the buyer’s word for. Let’s start with cars. You can consult one of those “fact checking” sites which can confirm how many owners the car has had, whether the title is clean, and whether it has been in a REPORTED accident. But do you really know if the owner skipped oil changes and used cheap, off-brand gasoline? Do you know if he accelerated from every traffic light like he was just given the green flag at the Indy 500? Well you do the best you can. There are no guarantees. If it’s a cheap “second” car, it may be worth the risk. If it’s the car of your dreams, and you are plunking down a fortune, you better be careful. Your safe choice? A new or certified pre-owned car with a warranty. So perhaps instead of that fire-breathing used Corvette you’ve always lusted for you will need to settle for a pre-owned Honda Accord Coupe, but you’ll sleep a bit better. Your choice.

Buying an existing business is similar. I will limit my comments to small, privately owned businesses. As any small business accountant will tell you, financial statements will take you just so far. Even when dealing with “above the board” individuals who follow the rules (and laws!) there are many complexities in financial reporting that leave grey areas. A perfect example is inventory valuation. Is it worth the original cost or has it been “written down.” Is it salable? If it’s not, it’s worth nothing. Is there a new technology looming that will make it obsolete? Another problem is arriving at the total business valuation. Since much of the price of a business is “good will,'“ has the business generated “good will?” You need to dig deep to find out if a past employee was a scoundrel. Law suits are easy to find, but a bad reputation may be well hidden. Did a key employee just leave to start a competitive business or join your key competitor. Well you can certainly ask. The answer may not be as certain.

Certainly, many people buy used cars that give them great service. And many people have had great success in a small business they have purchased. But for sure, you can easily find people who have sad tales to tell. Personally, if I am buying a car for my wife or one of my kids, I am getting one with a warranty. If it’s a “toy” for myself, I’ll take a chance.

If I was buying a business to support my family I know there are NONE that come with warranties or guaranties. Don’t exist. But I would seek one with the greatest chance of success. I would look for one that HAS SUCCEEDED. I would look for one that had systems and support to help me especially during startup and expansion. Which brings me to FRANCHISING. Franchises are built on a simple concept: SUCCESS IS REPEATABLE. Much of the guess work has been removed and the learning curve has been significantly flattened. Why? Because others have done it before. The franchisor has spent a fortune and countless hours improving their product and perfecting their systems and then has invested in marketing to create a brand. Better yet, as opposed to “financial statements,” the franchisor must complete and file - state by state - a FDD (Franchise Disclosure Document) that must contain 23 sections mandated by the federal government. These sections include such information as history, management, all lawsuits (current or past) of the company and its management. The name and contact of ALL other franchise owners including those who have left in the past year. And a full disclosure of costs.

Does that constitute a guaranty of success? Not at all. But it does give you a much greater insight into the business. As you move forward with your franchise purchase you are strongly encouraged to speak with other franchisees (this is perhaps the most important step in the franchise buying process) to get the unvarnished truth from people who work the business every day. While certainly not a guaranty of success, it does expose, or eliminate, the “skeletons in the closest.”

Last thing: Most business acquisition experts will tell you that a small business grossing under $250K per year is not worth considering and businesses that are selling for less than $200K are dogs. What could the cash flow possibly look like? But there are many franchises for $100-150K which require less than $50K cash to open that are good, profitable businesses that will support your family. And they all have that beautiful “new business” smell!