Is the Wave of Retiring Boomers Maine’s Greatest Opportunity?
Starting a business from scratch is one of the most rewarding – and difficult – challenges to undertake. Filing for an LLC is easy, but helping the business to grow and develop requires time, effort, and unconditional (and sometimes unrequited) love.
The hurdles are significant: 20% of startups fail in the first year – a rate that jumps to well over 40% by year 4.  Top reasons for failure include: No Market Need (42%), Not Enough Cash (29%), Not the Right Team (23%), Product without a Business Model (17%), and Poor Marketing (14%).
But, if you want the coveted title of Entrepreneur, what’s the alternative? How can you reduce these risks and still achieve your goals?
Buy a Business that already exists. Consider:
- 10,000 Americans turn 65 every day, across the country
- Maine is the oldest State in the US
- In the next 15 years, 12 Million Businesses are expected to Sell nationwide –  equating to $3.8 trillion in small businesses transferring by 2040
These statistics paint a dark picture that will affect every industry and county in our State… but, for the right people, it’s a land of unrivaled opportunity. By and large, the advantages of purchasing an existing business mitigate the risks of starting one, and you’ll still have the ability to tailor its next steps to reflect your strengths and goals.
Know the Advantages
Let’s consider some of the more overt advantages of buying a business. With due diligence & research, you’ll get:
- A proven market with historical customers.
- A complete set of systems and policies in place.
- A commercial lender that views the company based on historical performance, not unproven projections.
- An established crew of employees.
- Customers walking through the door on day one.
- An existing framework against which you can apply your own strengths & skills.
“But buying a business costs more money than bootstrapping my own,” you might argue. One advantage you don’t have with that self-funding? Seller financing. If you determine there’s value in the Goodwill (purchase value beyond tangible asset value), the Seller will likely need to hold a portion of the mortgage.
If the transition is handled amicably, this means you’ve got an invested, experienced former business owner – a sounding board with an interest in your success. This might be the best advantage you could ask for as you start your journey.
There may be some disadvantages, when compared to starting from scratch, but with clear communication and a well-designed purchase & sale agreement, the potential problems of a purchase can be largely mitigated. The first step toward avoiding confusion is to:
…Identify What You’re Buying
When you think about “buying a company”, most people think of what’s called a “Stock Sale” – when you’re buying the ownership stock of an existing company. In this case, all Assets – and Liabilities – transfer to the new owner.
Imagine your surprise when that undisclosed credit card bill shows up!
What’s actually much more common for small businesses is an “Asset Sale”, in which you buy the pre-identified Assets of an existing company. This removes a lot of uncertainty and potential for miscommunication, as each Asset is listed out – including intangible assets like Business Name & Logo, Phone Number, Signage, Customer List, etc. – and then only those assets are transferred to ‘NewCo’ (or whatever you decide to call your business).
This gives you and the Seller the opportunity to clearly define the scope of the transaction and gives you the chance to start with a fresh slate.
Things to consider when discussing purchasable assets:
- How are employees transferred (and, do you want them?) – do they have assignable contracts, or should they sign new contracts? Will part of the purchase price be based on employee retention or non-compete agreements?
- What licensing, permitting, insurances, etc. can be assigned, and what needs to be pursued as part of a contingency in the Purchase & Sale agreement? How can you make sure service continues smoothly on day one?
- What are the Sources of cash – commercial loan, buyer cash, seller note – and how much of the purchase price is assigned, or allocated, to which assets? What you pay for real estate, FF&E, inventory, goodwill, etc. might have a significant impact on your taxes – talk to your accountant about the best solution for you. Understand that the tax implications cut both ways, and the Seller might have their own incentives that weigh into the negotiation process.
Identifying what, exactly, you’re buying, and how you plan on buying it, is where most of the negotiation takes place. Value can be a difficult thing to discuss, particularly when the Seller has put their heart & soul into the business. When you start discussing value, it helps to know:
…Know What the Business Can Afford
Alright, we’re going to go off in the weeds a bit here, so stay with me.
The key concept is “What the Business can afford”. Yes, you’re expected to invest some equity yourself – but if the business can’t support the debt you’re putting on it with the purchase price, it’ll bleed money until A) You figure out a way to grow the company, or B) it collapses under its own weight, and takes everyone down with it.
Let me say this again, clearly: the business must be able to pay for itself.
First, calculate how much money it has generated in the past for the debt and the owner (a broker or financial analyst can help with this).
From this, subtract what you need to pay yourself in salary.
Whatever is left is the maximum amount left to support debt. If your annual debt service is larger than this figure, the difference is what you’ll need to reduce your own salary by each year, or you’ll need to pay more upfront to reduce that debt.
The worst thing ANY ownership transition can do is over-leverage the business. If it drowns in debt, the Buyer loses, the lender loses, and the Seller loses – especially if they are holding a Seller Note and getting paid over a period of time.
But you, the Buyer, will almost always lose the most.
The good news is, though – if the business CAN pay for itself, in addition to your salary, then you’re building equity every year just for doing a good job!
If you are uncertain about how to calculate debt service or analyze the maximum supportable value, talk to your Professional partner of choice. Not knowing is fine – but not asking is an unnecessary risk.
And choosing your Professional Partners is critical in your long-term success.
…Identify your Partners
(By “Partners”, in this case, I’m not talking specifically about co-owners; instead, I’m using the term to cover any invested party that wants to work alongside you and help you in the success of your business.)
In a transition, one obvious partner you could have is the Seller themselves. There are many other resources for the business owner starting out, including some comprehensive checklists for the basics. Some, like your local Small Business Development Center (which is grant-funded), are free for you and can be a great starting point.
However, a long-term partner greatly increases your likelihood of success. Ownership is lonely! Identify who you can use as a sounding board; find someone whose strengths replace your weaknesses. If you’re operationally-oriented, for example, a fractional CFO or Marketing professional is critical.
A well-rounded team should consist of several professionals that you can call upon as needed:
- A Financial Analyst or Fractional CFO can seem like over-expenditure for a Main Street business, but that’s when it’s critically important! When every dollar counts, don’t you want to know where each one goes?! If you’re not making money, you’ve got yourself an expensive hobby; and if you’re running a business without understanding the financial implications of your decisions, your “hobby” is driving blind down a twisty road. Save yourself a lot of heartache and buy a train set instead. They can also help with due diligence, historical & projected financial performance, ability to support debt, etc.
- An Attorney will help with contract negotiation, incorporation, and memorializing any other agreements – leases, employment, consulting, loans, non-competes, and more. Typically an Attorney is heavily involved in the initial transaction and groundwork but has less impact on the day-to-day.
- A Certified Public Accountant (CPA) will help with due diligence and understanding the historical financial performance of the business, as well as tax implications of purchase price allocation, incorporation, and more. An Accountant should remain involved in the business for tax preparation after the purchase is completed.
- An Insurance Agent will make sure you and the business have the appropriate insurances and are protected from the risks associated with your industry.
- A Commercial Lender will fund the deal – and any future capital needs you might have! Building a good relationship with your lender is a long-time benefit.
- A Business & Real Estate Broker will help with negotiation, assist with an appropriate determination of value, help you avoid transaction pitfalls, and will coordinate with your whole team to get the deal done.
Most of these professionals will give you an introductory meeting for free, so you can assess their competence and how they fit with your vision. Research, compare and find ones you like.
…Do it right – Make to Last.
When in doubt, ask. We all want you to succeed and will do what we can to support you. Ultimately, it’s your path to walk – but the more knowledge you have and surround yourself with, the clearer the path forward is!
 Robert Avery; Cornell University; CABB.org