Rather that launching a start-up, some entrepreneurs feel more comfortable buying into a going concern.
Justin Boortz wanted to own his own business. But with his wife at home with their three young children, he still needed an income right away.
Boortz, a mechanical engineer who had worked for another company for seven years, spent three years researching his options before concluding that his best choice was to buy an existing company -- A & R Manufacturing in Ramsey. The company, which has one part-time and four full-time employees, specializes in tool and die manufacturing, custom welding and industrial automation equipment fabrication.
"The biggest negative of starting up a business was I would start with no cash flow and no customers," Boortz said. "I probably wouldn't be able to pay myself for an extended time. I needed to make sure if I was going to do my own business, I did it in a way that was as conservative as possible, even though it is a risky thing to do."
Boortz, who closed on A & R Manufacturing in July, found the company through its listing with veteran business broker Bob Griesgraber, president of Minneapolis-based Opportunities in Business. Griesgraber, who has helped clients buy and sell thousands of businesses in the past 30 years, said buying an existing business often is a better bet than launching a start-up or buying into a new franchise location.
Griesgraber, who makes his living representing sellers and buyers of established companies, is hardly unbiased. Opportunities in Business, which he runs with partner Tom Green, has eight salespeople working as independent contractors. The firm represents small, independently owned, privately held businesses averaging just under $1 million in price and ranging from just under $100,000 to several million dollars.
The key for buyers like Boortz, Griesgraber said, is that an established business -- with existing employees, customers, vendors, sales and marketing and goodwill, plus tax returns and financial records to document sales history -- will generate cash flow immediately. That cash flow can go to pay bills, financing and the owner from the start.
"This is really what I was looking for, a place where I could use my engineering brain to gain customers, help existing customers and grow the business," Boortz said. "Cash flow is good. I've been able to take the salary I wanted and pay the bills."
Said Griesgraber: "The bottom line is that on Day One that guy is making money, if he's done his due diligence well, is financed correctly and the deal is structured correctly and it's not overpriced."
That contrasts, Griesgraber said, with the experience he has seen of those who launch start-ups or buy new franchise locations. In some cases, he said, the owners struggle as they go without pay for an extended period -- six months, a year, or longer -- while they build the business. In some cases, they run out of money -- after paying franchise fees, start-up costs and royalties -- before the business takes off and may have to sell at a deep discount, with little to show for their investment.
Evaluating prospective buyers begins with determining how much money they have to invest, how much they will need to support themselves and whether the business will generate enough money to cover debt service and the owner's living expenses, Griesgraber said. If the numbers don't add up, he likely won't introduce them to sellers, and banks likely won't finance them.
Other small business owners who have bought and sold businesses said Griesgraber's reasoning in favor of established businesses makes sense.
"You start your own business, you need a lot of relatives to help you through building it," said Irv Hershkovitz, owner of Dinkytown Wine and Spirits. "I started a liquor store from scratch and there was a lot of time where I worried about paying off the debt. ... You go to an existing business, you know what the gross is and hope it stays the same. You know what you can pay [yourself] out of that."
Jason Kleinprintz worked with Griesgraber to buy two established MGM liquor franchises and has bought two others directly, in addition to starting his own law firm. He said buying a business with an existing customer base made the investment seem less risky.
"There's a pretty high probability of success when you take a look at an existing business," Kleinprintz said. "It's a lot more work going out and finding customers from scratch."
The expert says: David Deeds, director of the Morrison Center for Entrepreneurship and the Schulze Chair of Entrepreneurship at the University of St. Thomas' Opus College of Business, said acquiring an established business is a great way to become a small business owner -- but you'd better have a plan.
"You have to come into a business with a plan to make it better, make it more profitable, increase cash flow," Deeds said, because the new owner faces paying the debt taken on in the acquisition and the possibility that the company's performance may suffer during the transition.