It is recommended that Investment Real Estate Basics is read prior to reading this article.
The focus of this article is a business in Vermont. I stress the Vermont aspect as the demographics limit both types and size of businesses which then translates into the actual dollars to be realized from the business. The comments in the referenced article in regards to risk and gain apply even to a higher degree when owning your own business. Of all the businesses started in the United States, 80% have disappeared in five years!
There are many aspects to buying your own business and some research) is definitely in order. One recommended source to check out is the U.S. Small Business Administration (SBA). Their website is http://www.sba.gov. They have available all sorts of resources on buying a business, business lending programs, etc. Most banks have SBA loan officers and I highly recommend you meet with one of them very early in the process. The information they can provide on business acquisition will be well worth your time, including the documentation they will provide you that will be necessary when applying for a SBA loan. This documentation provides am excellent resource for you in making sure you ask the right questions about a business and also do all your homework. The information provided by your local SBA officer will also be specific to Vermont.
Financing of businesses is different than for investment properties. A bank will lend money for business assets (furniture, fixtures, and equipment (FFE)), but will not lend money for a covenant not to compete or seller’s good will. It is not unusual to have only 50% of a business purchase financeable. If the business does not include real estate, the bank will only finance for the term of the lease. If real estate is also involved, the loan will include a portion for the real estate at terms as described in the referenced article and the business financed as above. The interest rate for the business portion will tend to be higher, reflecting the higher risk
When financing a business, one also needs to keep in mind the “reserve” cash flow needed for the business. The bank may require a specific amount for this as one of the major reasons for business failure is under capitalization.
Getting down to some specifics, what kind of businesses can you buy in Vermont and how much money can you make? The answer to the first part is that basically every business is always for sale. They might not be actively marketing it, but if approached by a legitimate buyer with a good offer, they would consider selling. Typical Vermont business run the gamut from: bed & breakfast, convenience stores with and without gas pumps, antique store, garden center, beauty salon, restaurants, fast food, etc.
How much money can you make? To a large extent this will be directly proportional to the effort you expend in the business. However for the most part, you are buying yourself a job, with hours that are more flexible and self controlled. In many businesses, if the owner kept track of hours worked and dollars made, they would find that they work for a very low hourly rate, but they are their own boss and this plus flexibility is important to them. Successful small businesses have very high owner involvement in the daily operation of the business.
How do you get to find out more about a specific business opportunity? Unlike investment properties, information about a business for sale is treated very confidentially. In most cases, the business is not listed for sale by name and the seller requires that before business name or any financial information is provided to a prospective buyer, the buyer must be qualified and sign confidentiality disclosure agreements. This is a two step process.
· Buyer is asked to provide information on both their financial capabilities and experiences that will allow the seller’s listing agent to decide that buyer is indeed qualified both financially and experience to purchase the business.
· Seller’s listing agent will then have Buyer sign a confidentiality disclosure agreement. Buyer will then be provided tax forms and other pertinent specifics about the business.
In summary, to pursue a business purchase, the following is suggested:
1. Visit the SBA website and your local SBA lender to determine your financial parameters
2. Meet with a commercial real estate agent experienced with Business selling and acquisition and have them represent your interests
3. Define your goals for business ownership especially in regards to cash flow
4. Assure yourself you are ready for the time commitment involved
5. Based on your experience, education, and interests create a list of those types of businesses that are of interest and those that are not.
6. Reduce list you created in step 4.
