A Six-Step Plan for Anyone Thinking of Buying a Business or Franchise

By Barry Thomsen

Step 1: People sell businesses every day and everywhere. There are several popular websites that advertise thousands of small existing businesses and franchises with only a listing fee. Here are a few examples:

Bizbuysell.com
Businessesforsale.com
Businessbroker.net

Or you can simply search the Web on your own.

You can search for free by entering a country, state and business type or category. Many listings will come up with general information and a seller's asking price. If you find one without a price listed, I suggest you pass it by. If they are not up front about what they are asking, what else are they holding back? Some will have a phone number and contact name. Others will require you to send an e-mail. If the seller doesn't respond to your e-mail within 48 hours (not counting Sunday), I would recommend you forget about them.

Step 2: Once you make contact with the seller, start by asking general questions about locations, length of time in business, on and off seasons, employees and other things that you want to know. It's difficult to get in-depth about financial information over the phone, especially if you have not yet visited the business. If you got most of the answers you're looking for, plan a visit. If it's a store, get the address and make an unannounced stop as a customer. They won't know who you are since you haven't met yet. Observe the other customers and employees. Check for neatness and cleanliness. (But keep in mind that neat and clean can be fixed by you if you're the next owner.)

Step 3: Now you're ready to set an appointment and see the entire operation, back room and all. There are two choices of when to go—during their slow time or during their busy time. If you want to sit with the owner and talk uninterruptedly, I suggest the slow time. Then come back again on your own during a busy period to see how well they handle customers. Remember, if you're the next owner you can change anything you don't like. Don't put too much weight on customer service; by doing it better you'll add more sales. I like to look past the surface and put more emphasis and concern on the basics. Many a mediocre business was turned into a great success with a new owner. Get to the core of the operation and see what's really there.

Step 4: Sit down and go over the numbers. Forget about the net profit—it won't be the same if you own the business. The important numbers, in my opinion, are the total sales, gross profit and fixed expenses. The rest of the information on the income statement can be adjusted and may not apply if you take over. Things like cars, office supplies, credit cards and family on the payroll will probably change. You may identify areas where a savvier owner can save money. An increase in sales will also add to the net profit.

When you look at gross sales, also consider the competition and the amount of marketing that was used to get these sales. If they have cut way back on marketing costs and you spend more, will sales increase? Does the business have any debt that you will have to assume or will the current owner pay it off with the purchase proceeds? Ask about any equipment, whether office, store or manufacturing. How old is it? What are the maintenance costs? For older equipment, ask what the current replacement prices are if it breaks down and needs to be replaced. Get the phone numbers of the companies where you can buy new equipment when and if it's necessary. Are there any enhancements or upgrades you can add that customers have been asking for? If you're on a fixed budget, be sure to add in the cost of any of these after sale expenses and setup charges.

Step 5: Talk to the building landlord about the lease. You are better off negotiating a new lease than taking over the current one, if possible. But only do this if the rent remains stable. If the landlord tries to raise it considerably, sublease from your seller. You should also get an automatic option to renew when the current lease runs out. Sam Walton learned a valuable lesson early in his career when he took over a thriving business and found that the building owner wouldn't renew his lease. Sam had to move and start over again. If you're interested in an existing franchise, check its Website and call its office for information. There may be a transfer fee that the buyer and seller usually split. Also request and read a copy of the franchise agreement. You will probably need to be approved by the franchiser, so be ready to fill out forms and answer questions.

Step 6: If you have gotten this far, there must be serious interest in your target business. Just like everything else, the business probably costs more than you planned. So how do you come up with the additional capital? You have two loan choices: business loan or home equity. A business loan is more difficult to get and has a much higher interest rate. A home equity loan is more easily approved, has a lower interest rate and is usually tax deductible. This means you even get some of your interest back. If you have the equity available, it's the smart way to go.

If you feel uneasy about putting your house on the line, it can mean you're not really sure about the business you're buying or you're not ready to be a business owner. You need to go into this venture with confidence and little fear of failure. Be very sure that you can handle the risk before you take the plunge.

The advantage of buying an existing business or franchise is that it's ongoing and has customers. It's up to you to serve those customers better to keep them and use marketing to acquire new ones. If you're new to the industry that you're considering, do some research at the library and on the Internet. Make sure you're comfortable with the hours that you need to invest in this business. You may have to miss some of your favorite TV programs and your kids' sports games to make it a success. Owning and growing a business gives you a great personal feeling of accomplishment, but don't underestimate the effort you need to invest.

Small business owners will find these AMA seminars useful:

• Debits and Credits: How Accounting Really Works
  
• Customer Service Excellence: How to Win and Keep Customers
  
• Performance Measures for Your Business: How to Determine and Measure What Really Counts
  

Author Bio: Barry Thomsen is publisher/editor of the Small Business Idea-Letter and Small Business Consultant. For a free sample of the Idea-Letter, email: idealetter@aol.com or call 877-700-1322