How to buy a business without overpaying: tips on finding and buying a proven performer - without getting soaked - includes a related article on how to determine how much a business is worth - Business Opportunities - Tutorial

Home Office Computing, August, 1993 by Gary Schine

Tips on Finding And Buying A Proven Performer--Without Getting Soaked

Tom Pazis, a Cornell-trained engineer, had tired of his job at a large electronics firm. He wanted his own business, but he didn't want to face the risk and uncertainty of starting one. Pazis got lucky--he found and bought a diamond in the rough.

He heard about a struggling company called Pro-Tech Security, which made and sold a simple but effective device to protect computers and other electronic equipment from theft. Pazis learned that the company's owner was more interested in a new venture than in giving Pro-Tech the required attention. Although Pro-Tech was struggling, Pazis decided its product was good and that its deteriorating customer base could be restored.

Pazis approached the owner and ended up buying the company for $100,000 in January 1989. He moved its offices into his basement and subcontracted all manufacturing. He organized marketing and customer service efforts with the help of a computerized database and some new brochures. Pro-Tech has been growing at an annual rate of 10 to 12 percent; 1992 revenues were more than $150,000.

"I looked at three or four other companies, but this one had an actual high-tech product that fit my engineering background," says Pazis. "I knew the computer business was growing and if I installed good financial controls with solid planning, I could grow this business over time. The former owner was happy to rub two nickels together in his pocket at the end of the day. He had no long-term planning or cash-flow controls."

EASIER TO FINANCE THAN A START-UP

Many entrepreneurs have become wealthy spotting opportunities like Pro-Tech. Others have done very well by paying a premium to acquire companies that are already operating profitably and need no major improvement. Like any business venture, buying a company demands a solid plan, a sensible strategy, and some investment of time and dollars.

Buying an existing business can be a quick path to small-business success. Buying a company is decidedly lower risk than starting one from scratch. An existing business has proven its ability to survive. It comes with something no start-up can--documentation (through financial statements) of its past performance and a tangible indication of its future performance based on its past.

An acquisition is easier to finance than a start-up. Banks look more kindly on a buyout because they are able to examine past performance. Further, the seller typically finances part of the deal by issuing the buyer a loan note, meaning part of the price is paid over a number of years.

Finally, when buying a company, you hit the ground running. The initial and treacherous start-up phase faced by new businesses is drastically reduced or even eliminated when you acquire a company. This is especially important to mid-career entrepreneurs with children, cars, and mortgages who aren't in a good position to go several months with high expenses and low income.

For existing companies, acquisition is a fast track to expansion. Many businesses have doubled their size overnight and proportionally lowered their expenses by buying competing or related firms--especially service-oriented firms.

FINDING OPPORTUNITIES

The first place many would-be buyers look for business opportunities is in the classified section of the local newspaper. While this sometimes yields results, only a small percentage of good opportunities and a large percentage of bad ones find their way to the classifieds. Paradoxically, the best bets are companies that are not necessarily for sale. Lots of owners think about selling but are too busy to take the active step of listing their companies for sale.

Of the dozens of methods our business-brokerage firm has used for finding buyable companies for clients, the best approach has been direct mail. We use computer databases to choose target firms by geography, industry, and size. We then contact each firm's owner by first-class mail and ask, "Would you consider selling your company?" On average, the response rate is better than 2 percent--not bad considering we are approaching companies that are not advertised for sale.

Many entrepreneurs dream of a diamond-in-the-rough scenario--a good company in need of some fixing up. While these deals are out there, not every troubled company can be turned around. Don't assume you can dramatically improve a troubled company merely because you believe you can manage it better. Successful turnarounds start with a company that has something going for it--such as a proprietary product, a solid market, or a clear niche. The next important ingredient is a clear but solvable problem. Finally, it needs a buyer with the appropriate skills to fix the problem.

For example, the fact that a struggling software company has done a great job developing but a poor job marketing a product that is perfect for bookstores is not enough of a reason to buy that company. If, however, you are a marketer who knows the book-retailing industry well, you may be able to put that company's software together with your knowledge and make two plus two equal five.