“So, I want to buy a business…”
The senior members of CPA firms function, to a large extent, as business consultants for their clients. This includes assisting clients in their efforts to acquire an existing business or possibly to start-up a new business. Often clients will approach us to help them find a suitable business to buy, knowing that we have contact with hundreds of small businesses. In spite of their best intentions, without an adequate foundation this process may be doomed from the outset and many times will result in a business failure. At ShindelRock, we think this can be avoided.
Find the motivation behind the business
Individuals acquire or start up businesses for a wide variety of reasons. In some instances a person will see opportunity in a specific business that is for sale. Other times individuals may generically seek a business in a specific industry or in a specific geographic location. The process will then involve the CPA firm and their client attempting to locate a specific target.
The other, and most common, situation, occurs when a person contacts our CPA firm with an overarching desire to own and operate a business, any business. The reasons cited usually involve one or more of the following:
1) They are tired of working for someone else and want to be their own boss.
2) They want to make more money.
3) They want the challenge and satisfaction of working to create something that is uniquely theirs.
4) They somehow think that they can acquire a “cash business” – one that will provide not only an opportunity to self-report income but also will allow them to deduct “discretionary” expenses.
5) They want a quiet, small business to give themselves an income and keep busy.
Most people in this situation do not have specific technical skills or training and thus are limited to the type of business that they are qualified to run. They are restricted to owning a non-technical business or one that can be learned very quickly. Franchising has been successful to some extent by offering prospective owners the opportunity to own a business and also provide the necessary training and support to operate the business.
Identify valid and addressable markets
The sad fact is that historically ninety percent of all new businesses fail within the first year of operation. Other businesses, although not complete failures, will survive on a marginal basis. A scant few will succeed. The causes for this rate of failure should be analyzed and used as tool by prospective owners in order to understand, and implement, the essential criteria necessary for a business to flourish. It is my observation that often time failure is the result of people starting businesses based upon flawed logic. Most new businesses are started by attempting to benefit from a well-developed existing industry: “I want to sell and deliver pizza”, or by participating in a concept du jour: “property values always increase – I want to start buying houses and rent them out”. The market is usually saturated with competing businesses and/or the concept has peaked (whatever happened to all those Crispy Creme outlets)?
The business environment is clearly evolving. Large, national chains of retail and service businesses has eliminated many of the traditional small businesses owned and operated by individuals. Markets are changing at an ever increasing pace. Facebook, Twitter, Starbucks, Kindle and E-Bay did not exist a generation ago. Without prior business experience most people gravitate towards existing, successful businesses and industries. Until recently the typical market model was to find an area that was under-serviced and fill that demand. If an intersection was growing and lacked gas stations – put a gas station there. If there were no dry cleaners in the area – put up a dry cleaner. The alternative thought process was to find an area heavily populated with competition and open a business there. The logic being that if there is that much business some of it will spill over. This is now, for the most part, an obsolete market model and a large part of the reason for new business failures. The large conglomerates and national chains of stores cannot be competed against by a small business owner. This fact creates opportunity but requires a different thought process.
Large retail and service business are successful because they can offer products and services at a low cost. In order to accomplish this large businesses must operate with exactly the same product and service everywhere. By their very nature they cannot be unique or individually tailored. Their entire market model is oriented toward the sheer volume necessary in order to overcome a large, fixed overhead. Customers must become fungible – defined by a commonality of product and service to be provided. Instead of trying to find an empty street corner to put up a hamburger stand a business owner today must instead identify niches – street corners – to fill the demands that cannot be provided otherwise. Find a niche or create one. The challenge here is that business opportunities now require creativity. The traditional way of thinking starting a business is no longer valid. (Our successful business clients also recognize this and evolve. The digital world has created entire new ways of doing business and is continuing to present both challenges and opportunities).
Check the concept against these criteria
My advice to prospective business owners is to evaluate all new business concepts using the following criteria:
1) Does it identify and fill a demand with product or service not currently available?
2) Does it apply existing technology in a new or novel way that results in lower costs or better service?
3) Does it create a product or service that does not exist but one that people will want?
Every successful business in recent years has applied at least one of these concepts. Tablet computers were created to fill a demand. GPS positioning devices applied existing technology in a new way. The basic business fundamentals, however, are still critical for success. Is there sufficient working capital? Are there realistic expectations? What back-up plans are available if something goes wrong? For those of us that remember the late 1990s there was huge dot-com industry growth. Some pundits even announced that the traditional way of buying and selling businesses was no longer valid and that this industry created its own rules. The dot-com bust in the early 2000s brought us back to the reality that all businesses must follow the same rules to survive.
The business environment today has changed and is evolving in an ever-increasing pace. Therein lies both the source of failures and the vast opportunities for success. The only real difference in our world today is the challenge (and necessity) of creative thought along with solid business work ethics.
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I found this article very interesting because I have a very good friend that not only purchased an existing company, but also started another company. My friend owns and operates two companies under a dba.
The first company is a carpet cleaning company that he purchased from an older gentleman whom could not physically do the work any longer. Included with the purchase, my friend acquired all of the existing clients, but more importantly he retained a great working relationship with the previous owner. My friend purchased the company nearly three years ago, but at any point in time my friend could contact the previous owner if he had any questions. The continuing relationship is one of my friend’s greatest resources.
The second company is a start up landscaping company. The services provided include the normal weekly lawn maintenance, but also provides the service of installing patio blocks and building retaining walls. In the winter months, the company truck is used to plow snow.
My friend is a great guy and is probably one of the hardest working people I have ever known. He is happiest when he wakes up early for work and doesn't get home from work until dark. The problem is that he thinks that both of his companies are failing. He is struggling just to maintain and has nearly zero profit. There are two reasons why he thinks he is struggling so much in order to operate both companies.
The first reason is the economy. I hate to blame the economy for anything, but in the current economy when people are struggling the first thing people will stop paying for is service luxuries. Hiring a person the clean the carpet and cut the grass is a luxury that some may never be able to afford. When they do not have the money, people will clean their own carpet by either vacuuming more often or by renting a carpet cleaning machine from a hardware store. While others will maintain their own yards and cut their own grass. When people don't have the money to spend, they will find a way to do things for themselves.
The second reason for his perceived failure is trying to collect money for work he has completed. One would think that commercial businesses would pay contractors for work that had been completed, but they are the clients that have the longest outstanding balances. For example, my friend was hired by a large mortgage and realty company to cut grass at thirty or more foreclosed homes. In 2009, the work was completed, but my friend has yet to be paid from 75% of it. The same company also owes him for some carpet cleaning that was also done in a number of foreclosed homes. However, this example is only one of the many companies that owe him for work he had completed more than a year ago.
The point of this story is that owning and operating your own business is not easy. There are so many ups and downs, but as long as the owner can maintain when things are down, then the good times will be that much better. I have lived this roller coaster my whole life as I watched my father and family encounter great times when my father was making more money than he knew what to do with to the not so great times when all we ever ate was home made spaghetti.
My suggestion to anyone that wants to begin their own company is to understand that things will not always be great. When times are bad, they need to keep their head up and continue on. Don't give up. If you have a good business plan and work hard, things will get better.