If you're thinking about becoming an entrepreneur, you might be wondering whether you'll be more successful starting a business or buying an existing business.
“'Starting your own business and opening your own store' has always been part of the American dream,” says Josh Torrey, nationally syndicated talk show host and author of the recently published book “Starting Your Own Business and Opening Your Own Store.” Wealth by Acquisition.
“Unfortunately, few people pay enough attention to the statistic that roughly 50% of startups fail within five years. But if a company survives for 10 years, it has a good chance of surviving and becoming a marketable business.. So if you have a choice between investing in a new business or buying an established going concern, think about the hassle, worry and grief you could avoid. But do it the right way, recognise the importance of having your own support team and never dream of doing it alone.”
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In recent years, many clients have approached my staff with business ideas, and as Tory rightly points out, the ideas and plans “arise out of the growing social media presence of Insta gurus and coaches.” They are selling an expensive do-it-yourself “How to Buy a Business” course, along with a list of several resources of the same name that are currently available for purchase from their website.
“Much like the stock market frenzy during the COVID pandemic, normally level-headed, mature adults are behaving like high school kids crazy about their first love. This is where it can get costly if you don't get help and guidance from competent professionals,” he says.
I asked Torrey to list some of the most obvious mistakes would-be acquirers make.
1. They follow the wrong advice and think they can do it alone.
So many people try to go it alone, following the advice of online business coaches who say, “I can coach you through buying an ongoing business. Why pay a lawyer or accountant?”
The result is a plethora of financial and legal issues. If you're buying a company, be sure to leverage the experience of a broker, transaction lawyer, and, if applicable, an accountant who is familiar with the company's dynamics. “This can save you years of headaches, stress, and legal repercussions for your company,” Torrey notes.
2. Buy retail or income property.
The second most common mistake is getting into retail or income real estate. Torrey emphasizes, “Retail is not a field to start in. You have to accept the fact that there is a lot of uncertainty in retail. Restaurants are retail too. Anything can upend your situation, from a pandemic to construction on the road in front of the business/restaurant you just purchased.”
In his book, he stresses, “Make sure you buy businesses that are not dependent on retail conditions, but on market and B2B conditions.”
3. Thinking you can succeed without giving it your all.
Contrary to other endeavors in life, when you buy a business, you either dive in all in or you don't. “Once you buy a business, you have to be committed and committed,” Torrey points out. “I've seen it happen too many times with 'entrepreneurs' who try to keep their regular jobs. A variation on that thought process is, 'I've saved up $200,000 for a down payment, so I'll just give it a shot with $50,000.' That never works.”
4. Change your team of advisors during the process.
“Don't listen to friends who've only run a business once or who have no experience at all,” warns Tory. “Now is not the time to listen to your friends and family. Unless they've been successful, their opinion doesn't mean much. Many first-time home buyers don't have business experience, so friends and family tend to lack experience as well, and their advice may steer you in the wrong direction.”
How to prepare for a business acquisition
Before you buy a business, you should prepare yourself financially by:
- Keep your credit score high
- Avoid taking on unnecessary new debt, such as a new car
- Deferring credit losses until after purchase
- Ensuring your tax records are accurate and up-to-date
At the end of the interview, Torrey shared his prescription for successful business acquisition for those who have never owned or run a business before: Instead of focusing on competency in a specific industry, start learning as many business skills as you can and acquiring as much practical business knowledge as you can.
“Your overall business skillset will be much more useful to you in acquiring and running a successful company,” he says. “For example, in a restaurant, knowing how to manage an employee will be more useful than knowing the perfect risotto recipe. The relevant and important skills come with the business. Knowing how to run a business — learning how to race and win, not just drive a car — is your goal.”
Dennis Beaver is an attorney in Bakersfield, California, and welcomes comments and questions from readers. ragonbeaver1@gmail.comPlease visit us! Dennis Beaver.
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This article was written by and represents the views of a contributing advisor, not of Kiplinger editorial staff. The advisor's record is available at SEC or FINRA.
