Everyone keeps saying it is a buyer’s market in the current economy, but what does that truly come down to? Person A stuck with something wanting to sell to Person B for a minimal loss on their original investment. Pretty simple, right? Not so much. On a day to day basis, I get about 2-5 offers to buyout existing business that want to get rid of every asset so their credit isn’t hurt or is minimally hurt. Some of these deals are really “deals,” some are “steals,” and others are just traps to set myself up for the same situation. Not that the original owner is playing games, but instead if I buyout a business for a “great deal,” I still won’t be able to make it profitable and essentially end up in the same situation with that business.
This also goes with the real estate market right now. I get numerous offers to invest in shopping centers, whose owners are going bankrupt, invest in homes that banks are stuck with, and some other real estate investments. The thing with real estate is that you have to look at the long term outlook. If I am investing $500,000 into buying a building, I cannot be looking to sell it within the next 6 months. If so, I am just setting up myself to be in a credit crunch- at a personal level. Instead, I have to pursue all my buys with the instinct that I will be holding on to them for at least 1.5 years – at a minimum. Also a good strategy with land purchasing, I found successful, is to search for undeveloped areas that seem to be "hot spots" where prime businesses would want to come. Having anchor businesses in an area where you own land can possibly become a quite valuable.
That said, it doesn’t mean that there are no lucrative offers in the market, because there are TONS. But you have to be skeptical. Don’t just jump into anything because the upfront investment doesn’t seem much or is a “deal.” Even though you may be paying $X for a property or a business, there may be some other strings attached. If you don’t plan for obstacles, you WILL HIT ONE and it will anchor you for a long time if not destroy you financially.
How do I pursue making a deal?
There is no written policy about how to analyze if a business is being sold for a deal, but I do take some things into consideration when I am investing in a “deal.”
-First I look at the upfront costs- Looking at these costs will give me a fair judgment of whether or not I want to look more into a certain business.
-Study the average market- If I think I’ve found something awesome, I analyze a bit more, to see if the costs that I am paying are less than what the typical costs of the business or property would be in a average economy. This takes some homework, but it proves if the price is legitimately low or “cheap.”
-Dig into the “behind the scenes” costs- Legal fees, taxes, etc. All of this comes into the behind the scenes costs. I have seen so many people try to buy businesses, in a regular economy, that they don’t plan for a lot of processing costs, which either delays the deal or even cancels the deal altogether.
-Plan for trouble- I am not one to be pessimistic, but it is only realistic to plan for downturns or things going wrong when going through with a takeover or buyout. Everything may not be planned when figuring out the “behind the scenes” costs, but the “unknown buffer,” what I call it, can set aside some cash reserve for me to run into trouble.
-Talk to my team- I talk to my lawyer, accountant and partners in certain deals, to see if something is worth going for or not. I can’t say how many times discussing things have brought up questions that really have saved me a lot of money.
-If all is a go- Then I set up a strategy to follow through on. How to implement new things into a business to make it profitable if it is currently at a loss, a growth plan, etc.
-Discount the venture immediately- Yeah, you read right, I count that every deal I make, being a loss, until the day I either sell it for a profit, or it starts to turn a profit where it can start paying for itself. This is the only wise way to invest. Never plan on something you don’t have- because you don’t have it, until you do.
Selling a business…
I have spoken to many business owners that say that “if I could only sell, I would be able to get out of being worried.” What is that? I mean seriously. Just because you sell your business, doesn’t mean that you are home free. What if the valuation of the price you sold your business for is worth about ½ the value you would have got in a great economy, or even worse yet, what if that amount of money just can’t buy as much five years down the road? And the last problem with selling a business is that people don’t have unlimited funds. While it is true that you will probably get money when you sell, you will eventually use up those funds and if you have no income stream, how can you survive? There is no guarantee that you will be able to start another business which makes a profit or even find another business to buy.
To conclude, I say buying anything, in any economic state, is a risk. There is always the fact that there is no “Turnkey Guarantee.” When selling you have to be careful that you aren’t setting yourself for failure in the long run. Sometimes holding onto something until you can better predict what you will be doing in the future can be the real winner. And sometimes holding your current position can save you from making a sour deal.
