Buyers have 3 primary reasons for buying a business:
1. Buying a job. Many events in life can lead a person to do some soul searching. This may lead them to wonder “why do I work for someone when I’m at least as smart as my last two bosses…”
2. Buying cash flow as a return on investment.
3. Buying a business to bolt on to an existing business to increase the competitive advantage.
Buying a job is something that sounds great in theory however without access to some serious capital/collateral and an opportunity for buying a business where you already have expertise, few funders will act as your source of financial backing. We have seen deals in the $10M range ready to sign and close but the bankers backed out because the buyer had little expertise in the business. The bank reduced its risk model when they went from 80% funding to 50% funding. Not many individuals looking for a job will have access to that much cash at close.
A better alternative may be buying the business you work in now. The boss probably knows you and may even respect your abilities and history. The owner is your best source of funding as they know the business. They clearly understand the risks involved and the real strength and weaknesses of the business. Many owners will perceive a serious offer from someone they know with less of a critical eye than an offer from a total stranger. We have seen owners provide vendor notes from 20%- 50% of the agreed value, with the bank and the employee funding the balance.
The bank views the exiting owner as a vendor with a certain amount of flexibility. The funders can easily verify you know the business which reduces their risk, and the bank tends to view employee buyouts as a special category of transaction where they literally use different rules and covenant models.
The icing on the cake is this is also a positive process for you. As an employee you know the business model, the skeletons and history, the team of people, the client base, business cycles, and perhaps even a few key problem areas that would dramatically benefit from what you know you would do if you were in charge. When your goal is to own your own business you should take a moment and honestly assess the potential for where you work. If the business you’re working in has no potential for equity then you may decide to find another place to work. But this time you’re working with a plan and a deliberate agenda; the outcome could change your life.
We will discuss buying cash flow in the next post.