Decisions When Deciding to Buy a Business
There is a saying that most everyone has heard at some point in life that goes, “we learn more from our failures than our successes.” We also know that 90% of startups fail, and for some businesses to succeed, it has to come at the failure of others. This is, of course, where I come in. I have worked for large multinational corporations, small businesses with only a few other employees, and owned my own business.
With going into business for yourself, there are a few different paths you can take. Perhaps a parent started it, and as the child you are taking it over when they retire. Or, if in the corporate world, as you move up within the company, you become the boss. For this article, we are going to focus on small businesses, and my experience with that. We are going to look at the decision process for buying an existing business that I used and what I learned from it, so that if you too are looking to go out on your own to pursue that dream, you can learn from my experience.
Buying an Existing Business or Starting from Scratch
The first decision to be made is are you going to buy an existing business or start one from scratch? Are you going to take a subject you are knowledgeable about, are a hobbyist at, or a current career and turn that into a full-time business? There are advantages and disadvantages to each such as the startup cost might be different or the brand awareness.
Buying a Business
In purchasing an existing business, the upfront cost can be a bit higher compared to starting from scratch. This might seem counterintuitive because if the business has equipment included in the sale, the equipment and supplies are used instead of new. What you are really paying for with an existing business is the brand value and existing customer base. The place has a name associated with it, and assuming it has been well managed, you gain that value. They have online reviews, and clients or customers already established for repeat business. All of that has a value beyond the cost of equipment, signs, and pens with the logo to hand out, which is why it is important to look at this, since it is incorporated into the asking price. However, if the brand has a low value, you will need to turn that perceived value around. For example, if you are buying a restaurant with bad ratings on Yelp and Google, and it is known for having inferior quality food, you will need to take that into consideration. However, if it is the opposite and they have an excellent reputation for being a quality restaurant, you will have a turnkey ready location with customers who come regularly. When negotiating the price, those online reviews can be used in the negotiation by the seller or the buyer to argue for more money or less.
Another advantage of taking over an existing business is that the previous owner might stay on for a time to show you want you need to know about the business. You get some training out of the deal. You can also look at the financials of an existing business to decide if it is worth the asking price. When reviewing the financials, look at past earnings, trends, and projected future earnings. Keep in mind the income needed to cover the cost of the business, your loan payment (assuming you took a loan to pay for it), and your costs of living. You still have to pay your bills outside of work with money made from work.
Starting From Scratch
When starting from scratch, the startup cost might be less because you are not paying for brand value, however that means you need to create that value after the business opens. Using the restaurant example again, people know nothing about the business, so opening the doors on the first day you will need to get customers through the door, which will involve an additional advertising and promotion cost. Your new business won’t have any online reviews for people to look up and that might turn them away.
Financial planning and having a decent nest egg are essential to starting a new business. The equipment to run the business needs to be paid off along with a loan (if you took one) to start the business, and to cover the rent of the location (if brick-and-mortar) or other associated costs. This needs to be paid from income you hope to make. Look at other businesses that do the same and try to calculate what they earn, and have enough in the bank to cover that. Most businesses go out of business within the first year because they open only to find out that they don’t make enough.
Besides the status of the business there are many other things that should be considered if making the decision to go into business for yourself.
We should build companies to last beyond the current owner. One way to do this is to look to the future and identify if the business product or service you are going to offer is something that is future proof. It is still possible to train and work as a wheelwright (someone who makes wagon wheels) and there are still wagons being made and needing service once that happens. However, that is a niche market. And, if looking to open a business that follows your passion of wood working and wagons, what is the market going to be for the business in the future? Flip that to Apple, the company with the largest market cap in the world. They are continually innovating and releasing new products that we often don’t even know we need until they come out with it and we realize that “Oh yes, I do need that.” Why is that? Because the company culture is also looking for the future and not the past.
When getting into business, it is difficult not to be emotional about it, however it is worth trying as much as possible to make decisions like changing careers without letting your emotions take over. It can be exciting to take on a new business path in life, to let go of that previous job and be your own boss or to have a shop with your name on the sign overheard. We have the excitement associated with being the one in charge and employees reporting to us. But once reality kicks in and the excitement ends, what is left over can be hard work. You now are the one responsible for making sure the place makes enough money to pay the employees, the rent, the cost of goods. Instead of working fewer hours many business owners suddenly find themselves working more hours.
Get a second opinion. And that should not be a friend of a family member. This should be obvious, but friends and family often tell you what they think you want to hear, at least if they are the encouraging type.
Don’t Be Afraid to Fail
We hate to fail at something; it is human nature. But many of the most successful entrepreneurs have failed as often as they have succeeded, because they are taking risks. Milton Hershey failed at multiple businesses before founding The Hershey Chocolate Company.
Any risk we take involves the possibility of failing, yet without risk there can be no success. Therefore, it is important to know when to quit. Get a date that is logical and say to yourself if the business is unsuccessful by X date, let it go. You are the definer of your success.
In failing or succeeding, we usually define that success as a financial one. If you open a store or other business, there is the cost of the location (if brick-and-mortar), the cost of paying people, production costs (if selling a product), etc.
This is why it is important to have enough in the bank to live off without relying on the business, especially for the first year. Most new small businesses fail within the first year because the owners don’t plan to not make any money. They assume they will be instantly successful and cover the cost of doing business plus living costs. This is often not the case, so be sure to have enough saved. Also, be wary of using your savings money to cover the business costs, try to use it to just cover your cost of living.
I bought an existing business; specifically, a photography studio. Like many people, I had pursued photography as a hobby for many years. On top of working as a photographer, I studied photography, learned the ins-and-outs of a camera, took classes in studio lighting, worked as an assistant for wedding photographers and shot numerous weddings through my own business as a side income. So, when going into business as a photographer, I felt confident that my experience would set me above many of the hobbyist photographers.
I had looked at opening a new studio space but when browsing the businesses for sale site, I found a listing for an existing studio. I went to look at it and it had an excellent central location in a large space. Another advantage was that it had been established with a long list of positive online reviews and a strong social media following that I would not have to build. The studio had a decent amount of repeat business, allowing me to earn an income as soon as I took over the studio.
The existing studio owner agreed to stay on for a month to go over how she kept the books, worked with clients, and importantly for me, since it had been several years since my studio photography class, to go over studio lighting. I could watch her with clients and do a few shoots myself while she observed me. We kept in touch after she left as well and was a great resource should I have questions that might come up later on such as “where did you order those logo stickers from?”
When going through the business, I felt it was overpriced at what she was asking and negotiated the price down a bit. In retrospect, I should have negotiated more. The issue was that it was difficult to identify comparable businesses to decide if the asking price was accurate. Restaurants are commonly sold and bought, so it is easy to see if a restaurant in an area is being offered at a similar rate; for other businesses, this is not always the case. Another mistake I made when it came to the asking price was looking at the existing financials. I looked at the overall past income, which included weddings, the most profitable portion of the business. However, my plan was not to do as many weddings and focus on the in-studio work.
One of the hardest things to do is keep emotions out of important business decisions. So, trying to do that, I asked a couple of photographer friends to look at the business to help me decide if it was a worthwhile decision. Unfortunately, I asked friends who were also photographers, and to be supportive, they encouraged me to do something they were also enthusiastic about. What I really should have done was spoken to someone who was strictly a business person.
Another emotional mistake I made was not listening to the correct ones. The studio space was leased with three years left on the lease, which was actually good in my mind, assuming that if it didn’t work out, I wasn’t held to a super long lease, and that if it did, I could renew it at a similar rate. When meeting with the property manager, I instantly had a vibe that he was going to be difficult to deal with, and something about him rubbed me the wrong way. I also noticed the frustrated tone that the existing studio owner used when interacting with him. But I ignored it, I’ve read “How to Win Friends and Influence People”, I’ve taken numerous trainings in my life on working with people, heck, I even wrote a book on working well with your manager in a corporate environment, I certainly could deal with a property manager who might be a bit lazy or difficult. It turns out I was wrong. I had to deal with a leaky roof, garbage in a shared kitchen, and extreme incompetence. To use a relationship analogy, it was like meeting someone on a date and you get that vibe but you ignore it because you want to get laid, but later regret it. I saw that studio space, became infatuated with it, and ignored the vibe about the property manager because I wanted it. The relationship ended with me having to take him to court just to get my deposit back when I moved out.
Anyone in the public has access to a top-quality camera that does such a good job with the automatic settings that the user barely needs to know how to use the camera. My mistake was assuming that people would want someone to take pictures who knows how to use the cameras manual settings, how to place lights properly, and how to direct people to get the best image possible. I assumed people would pay an appropriate price for this service. I assumed wrong. The future of photography is going to make the photographer even less necessary, as cameras now are being designed to take pictures that allow for focus to be adjusted after the image has been taken, and software that allows people to more easily be adjusted in the image, backgrounds to be removed and replaced, and other features that don’t require a knowledgeable photographer. The iPhone has a pretty damn good camera, and it is only going to get better with each version.
A common side gig for people with nice equipment is to work as a wedding photographer. Wedding photography is a far more difficult job than people realize, and so when asking for a fair price the response can often be “why should I pay you that when my friend, cousin, or person on Craigslist will do it for much less”. The average amount of money a wedding photographer makes per wedding has decreased over the past 20 years, not gone up. The only people making decent money at it are the top tier photographers, while the rest compete on price down at the bottom.
What The Market Wants
When I left my nice corporate job to take over a photography studio, I had a decent chunk of money in the bank. They paid me well and I lived modestly. So, I knew I could go a few months at a financial loss while turning the business into what I wanted it to be, which was a quality photography studio. I didn’t want to be the place that got people through the door with the promise of a cheap session, then when it came to ordering pressured them into high-cost prints. I wanted to offer quality service and products at a fair price. However, where I was located did not support that type of market. The first question I would often get was about the cost, not the quality. So, when they found out that the cost was a bit higher than most, many potential clients went to other photographers disregarding the quality of the service and product I offered. After all, why should someone “pay so much when my friend has a camera and will do it for free or for less?”
But instead of changing my business model to match the market or adjusting my offering, I started funneling my personal savings account into supporting the business, instead of saying if the business isn’t profitable by a select date to close it and sell the equipment.
I still have the photography business, but on a much smaller scale, closing the doors of the studio space as the overhead of rent, electricity, and hassle of dealing with one of the world’s worst landlords wasn’t worth it to me. Now, whenever I have a photography shoot, I rent space from other studios. My overhead is low, however, the income is also reduced. This is fine because I learned a valuable lesson in running a photography studio. I failed yet took from that failure some valuable lessons that will go into future endeavors, and it gave me something to write about on Medium. I learned to look at the market and see where technology was taking us. With cameras becoming smarter, YouTube videos offering free lessons, and weekend workshops, everyone is a photographer nowadays. The basics of supply and demand say with more supply, the demand goes down along with the price. Too many photographers mean the amount of money each photographer makes will continue to deflate with the market.
Of every business I worked in, the one that hurt the most was the one of my own that eventually closed its doors. Not because I failed at it, but because I didn’t acknowledge that I was failing at it sooner. I held on too long, like a bad relationship that strings you along, and later you look back and say, “why didn’t I end it sooner?” I spent my savings to support the place versus strictly using the income from the business to support it. And I didn’t look at the market trends to see what the current market wanted and the future one would become. Yet, like the saying goes, by failing, we learn something, and when it comes to knowledge, my experience was a success because I now know more to take to my next endeavor.
Note: This article as also published on medium as To Buy or Not to Buy a Business