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What kind of business should I buy or start?

January 6, 2012

As Business Brokers, that is one of our favorite questions.  And the answer is:  How the heck should we know?!!?

People who ask that of us – complete strangers, to them – could just as easily ask, “Who should I marry?”  “What should I name my first born?”  “Who should I name in my will?”  (The answer to that last question would invariably be us!  So, don’t ask…)

The first questions to ask your self is:  What is my background and experience?  What do I already know that would lend itself to owning a business?  The more you know going into either a startup or a business acquisition, the better your chances to succeed.  Forget about startups for a second.  As Business Brokers, we WANT you to buy through us and SUCCEED; we do not want to sell you swampland inFlorida!  We want you to buy a successful operation, make it bigger and more successful so that you feel good about what we did for you and with you, and you will ultimately sell that business through us and buy an even larger one, again through our efforts.  In our Brokerage, 70% or more of our own business comes from satisfied Buyers and Sellers, as well as their Accountants and Attorneys.  Your success is our success, in a very real way.

So again, what has been your work history and what skills do you have that lend themselves to either a business startup or purchase?

Other questions might be – but are not limited to:

  • How much money do you have to invest?
  • How good is your credit?
  • Do you have any assets the Lender can use as security?
  • How much money do you absolutely need to earn?
  • How much do you ultimately want to earn?
  • How hard do you want to or are willing to work – physically and/or mentally?
  • What hours do you want to, or can you work?
  • Are there any limitations you have, culturally, religiously, morally…anything that would prevent you from working in a specific area, such as Liquor?  (We had to talk one gentleman out of buying a very large, very upscale Wine Store:  He did not drink because of the restrictions of his religion; therefore, he could not then learn about wine and was reluctant to put sufficient trust in a General Manager to make professional decisions about wine selections and such.  All he saw were the Profits.)
  • What are your geographical restrictions?
  • What hours are you able to work, and what are your restrictions?
  • What do you WANT to do?

All of these things have to do with narrowing your field of interest and capabilities.  There are more, but these are the main questions YOU have to answer.  We can ask, but YOU are the only one that can answer.

Frequently, people come to us and one of the first questions they ask is, “What kind of business is good?”  This is a variation of the same, original question.  We can tell them, “A Liquor Store.”  But if they have religious restrictions, do not want to work evenings or weekends, if they do not have the credit to buy the Inventory, what good does it do to tell them that a good business to buy is a Liquor Store?

We had one guy – a really nice guy – who called us on the first of every month for about a year and asked what we had that could generate $100,000 a year in profit.  The problem?  He had about ten cents to invest.

You need to be realistic with your expectations!

We went through a period where it seemed like we were dealing with a large number of people that started businesses from scratch, because they wanted to be home with their children, and their previous jobs seemed to have been taking more and more time away from the family.  They thought that by starting and owning their own businesses, they would be able to write their own hours.  WRONG!

One woman, in particular started a sizeable Children’s Day Care, because it was daylight hours, Monday through Friday.  What she did not recognize was that, because of the way the financing was structured, the Cash Flow in the beginning meant everything that was coming in was also going out, to pay for the startup costs.  In order to shave costs and get to a Break Even point on Operational Expenses, it meant she was working as part of the regular staff during the day; and doing the administrative work in the evenings and on the weekends.  She ended up in worse shape with the family than when she was an employee.  She and the others described above were coming to us to sell their businesses, essentially for the same reasons.

If this lady had worked in a Day Care Center before owning one, she may have been more able to create a meaningful Business Plan, in order to become more aware of the demands that would be placed on her.  But she went into something she did not know about previously, and had unrealistic expectations out of her ignorance.  That is not to say she was stupid!  Far from it.  She simply did not have the experience that would have made her more aware of all of her own responsibilities, as an Owner.

There are circumstances where you may not want to do something similar to what you are currently doing.  We have historically dealt with a lot of people that feel the need to make a complete change.  Software Programmers are one such group.  Surprisingly, another group are Attorneys – and not because they are not making money, in the legal profession.

So, how do you learn about an industry in which you may want to become an owner?

One way would be to take some time to find employment in that industry and learn about it.  This can be a long term strategic move if you are starting at the bottom – and you may need to start at the bottom precisely because you do not have the experience – and you may not be in position to learn about management responsibilities until you gain that experience.  A real catch-22.

Another way is to simply go to a number of similar businesses and ask a lot of questions.  Do you know a Liquor Store Owner?  Do you know a Day Care Center Owner?  Do you know a Day Care Center Owner that spends a lot of time in a Liquor Store?  (That was a joke!)

Ask those Owners what they like about their businesses, and what they dislike?  What are their biggest challenges?  What would they do differently, if they were to start over?

Getting experience in another area is slow going.  But one way to do it most efficiently is to buy a well known, well regarded Franchise.  With a GOOD Franchise, you can learn about how to get started in the business, and they will have ongoing training and support to allow you to grow your business, over time.  This assumes that again, it is a GOOD Franchise and that you listen to and do what they tell you.

Some people say, “I don’t want to pay the percentage of sales or franchise fee!”  If they are a GOOD Franchise, not only does the ongoing supervision pay for itself, but how can you argue the marketing value of a McDonald’s or Burger King?  The Franchise Fee CAN pay for itself, if it is a GOOD Franchise.  Moreover, the re-sale of such businesses is usually higher by 10% to 20% above a non-franchised competitor with the same Cash Flow.

Note the emphasis, as represented by the irritating use of CAPITAL LETTERS.  Not all Franchises are created equal.  Some of them are very weak, in terms of the value you get for the fees you pay; others are downright awful!  There are some we do not sell, no matter how much the Seller asks us to represent them.  Not that we have anything against the Seller:  But there are some Franchises where we do not believe there is adequate value in the business – because of that Franchise – to warrant us bringing them to a Buyer.  And the selling experience to the Seller is most often dissatisfying, not because of anything we do, but because of the way the re-sale program is established by the Franchise Company.  (We have the same philosophy in deciding whether to sell a non-Franchise operation; the difference is that, with some Franchises, the negatives are consciously built into the Franchise Company’s operational model.)

Researching and writing a Business Plan (a subject covered at length in a later post,) would help you learn about the pros and cons of a given business.  The only way to determine what business is best for you is to take the Profit incentive as only a part of the entire mix of considerations, and make that decision for yourself.

Do not let someone else talk you into a given business.  And look out for questionable claims.  For example, “This is a recession-proof business!”  WRONG!  There is no such thing, unless you are buying the Military.  And in 2012, even the Military is down-sizing.

Liquor Stores are one of those things that are claimed to be “recession-proof”.  People frequently point to Liquor Stores and say, “Even when people are broke, they still drink.  Maybe more so!”

True.  But some of the Liquor Store Owners we know have certainly experienced a downturn in business, as a result of the 2007+ recession. One Owner told us, “I sell as many bottles of Scotch now, as I did before the recession.  But now, instead of selling Johnny Walker Black at $57 for a 1.75L bottle, people are buying Inver House Glen at $13 for the same sized bottle.”  Even if his Profit Margin is at the same percentage for both brands, that results in quite a different Dollar amount.

Some Restaurants seem to still be doing a brisk business.  But speaking to a Burger King Franchisee recently, we learned that they are struggling somewhat as well, and some of the reason for that is due to the competition from other, slightly more upscale Restaurants, in their efforts to maintain themselves in tough economic times.

This is because Restaurants such as Appleby’s and such are making tremendous deals on discounted, full meals, that suddenly come close to what it costs the consumer to purchase a full meal at a fast food Restaurant.  So, the places where you eat with your fingers are suddenly coming close in price to places where you can eat with – what do you call them? – forks and knives!  Yes, yes, yes, once you tip and so forth, the full service Restaurant is more expensive than Burger King, any way you cut it.  But people do not necessarily think all the way through such decisions when they are hungry, the kids are whining and there is an Appleby’s right in front of them!  And when you have the opportunity to be seated comfortably and eat something other than a burger and fries, the added expense can be much more easily rationalized.

Moreover, people do not necessarily thing it all through, when motivated.  Frequently, they look at the posted price offer and not think through the issue of the tip.  They may also say, “Wow!  A full meal for $5.99…” then actually order something different at a much higher price, because the menu makes it look much better than that $5.99 meal.  That’s great for an Appleby’s, but it is to the detriment of a Burger King.

Trying to determine what business is best for you is like deciding what underwear fits best:  Some people prefer boxers; some like briefs.  (This is a metaphor to which men will predominately relate…)  As Business Brokers, we cannot tell you specifically which is the best fit for you.

Once again, YOU have to do some researching and personal soul searching.  We can perhaps tell you whether a given business has some of the characteristics you want, in a business; but the ultimate parameters and decisions must be determined by you.

(Receive in-depth, personal consulting online, with The BAF Group’s principal at https://clarity.fm/donaldbarrick .

The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service. Its Principal Broker possesses 25+ years of Business Sales and Divestiture. Although most of our work is involved in the Mid-Atlantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well. Some of our listings and additional information about us can be viewed at www.bafgroup.com. Thank you for your interest.)

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