While it’s true that the economy is growing very slowly and people are slow to spend money, now is the time to take advantage of opportunity. What opportunity, you might ask?
For starters, if you look around, you’re likely to find tons of business bargains. Of course, you can build up a business from the ground up, perhaps basing it off a weekend job, but you can also buy an established business. Remember, when consumers struggle, that means businesses struggle too. When revenues are down, business values decline, too.
Buying a business
When you buy a business, you usually pay a multiple of the net income of the business. So if the business nets $100, 000 and the multiple is 5, you’ll pay $500, 000 for the business.
Typically, when you value a business, you look at the net income over the last several years. And you don’t need me to remind you that business has been rough over the last few years. Net income has likely been on the decline, even if the business is perfectly healthy. The nice (very nice) thing about declining revenues (from a buyer’s standpoint) is that the multiple you pay will be much lower when revenues are declining.
Let’s say that you’ve identified a business to buy and the net revenue this year is $100, 000. If last year the net income was $125, 000 and the year before that it was $150, 000, the business looks like it’s in decline and the buyer can’t really argue the point. That being the case, you might be able to buy it for 5 times earnings or $500, 000 or less. Remember, in this situation, you are helping the owner save his business.
But let’s say the business made $50, 000 two years ago and $75, 000 last year. This year, it was $100, 000. This looks like a growing business and as such, the buyer might demand 10 times earnings – or $1, 000, 000. Do you follow? Because the overall business climate has been slow, you’re more likely to find companies with declining revenues and therefore, you’ll be able to get them much cheaper.
Now, if you’re convinced that now is a great time to buy a great business, it’s important to buy the right one. Don’t get enamored with the cash projections. Remember that business is about competition. Only buy a business if it has some competitive advantage.
Even better, if you have some expertise in a particular area, try to buy a business that leverages your expertise. If you can buy the business from a seller who lacks that expertise, all the better. You’ll be able to buy it on the cheap because it was being run by a novice, and you should (hopefully) be able to achieve a quick turnaround.
The same argument can be made for finding and retaining staff. During tough times, it’s easier to find very qualified people to work for you and keep them on your team – if you treat them right. If you are skilled at managing people, this could be a huge competitve advantage for you and (possibly) reason enough to buy a business.
Running the business
Running a successful business isn’t rocket science, but it’s not for everyone. You can outsource things like the accounting, but you still need to understand business budgeting basics. You can hire mangers, but you have to be able to lead a team and inspire people if you have employees. You can hire salespeople, but you better have sales skills yourself if you want your business to be a success.
If you lack any of these skills, it might mean the difference between success and failure. You might be able to overcome some of these challenges by taking on a partner who does have these skills but don’t spend your hard-earned money on a business and just “hope for the best.” It doesn’t work that way.
If you buy the business right and focus on getting the right people on your team (both of which should be easier to do these days), it will actually be easier to run the business in many ways.
First, your debt payments will be lower because you’ll pay a bargain price for the business. Next, things will run smoothly because you’ll have great staff who appreciate having a job. It’s true that sales might be slow in the beginning and that it will likely take time for you to get the real swing of things, but now is still a great time to go into business for yourself.
Yes, real risks still persist, but even the world’s biggest pessimist would have to admit that the likelihood of our economy relapsing into the dismal situation we were in a few years ago isn’t very high. If the economy simply stays the same or improves ever so slightly, buying a business now could be the best move you ever made.