BUYING A BUSINESS: THE GOOD, THE BAD, AND THE UGLY
Does owning a business sound exciting to you? Have you ever dreamt of being your own boss, making all the decisions, working your own schedule and not have to report to anyone? These ideas sound wonderful at first; however, if you ask any business owner, you will most likely get a different perspective.
My name is Nancy Spelgatti and I am a new business owner. I would like to share my personal experience of purchasing a business and to give new buyers some advice on what to expect. My goal is not to discourage people, but instead to share the valuable lessons I learned as a new entrepreneur and to highlight the good and challenging experiences to provide a realistic picture of what it takes to be a business owner.
I graduated with a BS in Finance and completed my MBA in Finance/ Accounting. I spent the last 20 years in corporate America doing various finance jobs. The last 10 years were in oil and gas. I was very fortunate to have jobs that allowed me to utilize my educational background and to do the work that I enjoyed which was working with numbers and using my analytical mind. In early 2016, I was informed that my company was being bought out by a larger competitor and my position along with 3,000 other employees would most likely be affected. I’ve never been laid off before and have never been without a job in my 20 years. Needless to say, this was a scary time for me. I worried about my family’s financial future and worried about how long it would take me to find a new job. I was also angry that I could be easily replaced after the many years of finance experience and how it didn’t matter to the company that I was a big part of the team’s success.
Instead of giving into my fear and anger, I applied my energy into finding solutions. I started preparing for the worst case. I contacted my banks and increased all my credit card limits just in case I would run into a tough month. I have excellent credit and never kept a rolling balance so that was easy for my bank to do. My husband and I have always lived below our means and luckily had a decent savings for a rainy day. We also contacted a realtor to put our house on the market and started brainstorming of what I would do if I were to be laid off.
(Lesson 1: You must have good saving habits and always protect your credit. Cash is king. Having cash and good credit will allow you financial power. This is important in times of trouble as it allows you to be prepared for the worst.)
My husband, who is a serial and successful entrepreneur, started researching the potential idea of buying a business that I could run. That frightened me as I have never owned my own business, but at the same time, it was an exciting idea. After receiving the news of possibly losing my job, I did not like the feeling of not having control of my future and the idea of owning my own business gave me a sense of hope.
My husband found a franchise tax business for sale in the east coast. It was with a reputable company that has been around for many years. He looked over the company’s financials and felt the numbers were strong. Additionally, he felt this would be a good fit for me as I have tax experience. On paper, the business looked promising and the risk factors were lower. I entertained the idea and did my own review and felt we could move forward in reviewing the company. We signed a Letter of Intent (LOI) with the Seller and started our due diligence process which was a total of 3 months. My husband traveled to the east coast on two different occasions to meet with the Seller, to review the financials in depth and to do site visits to the 17 offices that were located in two different states. Since this was a tax company, we had to really understand how revenues and expenses were impacted due to the seasonality of the business. We learned that the business would require good budgeting skills as you would need to carry revenues that are collected in a few months to cover the expenses year round.
(Lesson 2: It is imperative to thoroughly review and understand the financials and the business operation. Take the extra time to dig and dig and get all your questions answered. Remember that you are making a huge purchase and your future depends on your thorough work. The Seller’s goal is to get the business sold. It is your job to locate and explore any possible concerns and to decide if these are fixable or not. Most brokers will be sure you have an exit clause in the LOI which allows you a full refund of your deposit if during the due diligence period you decide not to buy the business.)
After the many months of our due diligence review, we decided to move forward with the business purchase. Since my husband and I never bought a business before, we needed to put together a team of experts to help us. First, we were introduced by the broker to Steve Mariani with Diamond Financial Services to get started on the business loan approval. To my surprise, the loan approval process was very challenging as lenders aren’t fond of seasonal businesses due to the cash flow fluctuation concerns. Additionally, the 17 offices had month to month leases which created additional concerns as lenders like seeing businesses in steady locations with extended leases in place. We were very fortunate to have the DFS team there to guide us through the entire process. They immediately recognized a solution with the lender and stepped in to help. Without their assistance, we would have not closed on the loan and would not have the business today.
Second, we hired a business attorney to help with the purchasing process. Our attorney was worth every dollar as we ran into some challenges coming to an agreement with the Seller. Additionally, our attorney helped with the formation of our business, helped provide us legal advice and sometimes at a hefty price was our mental counselor. Often times, business owners try to skip this expense and not hire an appropriate attorney for such a transaction. It is not required to have an attorney for a business purchase, but from my personal experience it is highly recommended. My rationale is this, if you plan on putting your life savings down or a large amount down, wouldn’t it be in your best interest to ensure all legal matters are handled properly? The money you spend on an attorney is to protect you and your personal assets. Furthermore, it gives you peace of mind and in the large picture; it is a small expense in comparison to everything you are spending. Furthermore, this is an expense you can write off as part of your original cost of purchasing the business.
Last, we hired other important professionals such as a CPA to help with the transition of the business financials and worked closely with a local bank to open a business account and open a credit card with mileage benefits for the company.
(Lesson 3: Going through the process of buying a business can be very difficult and scary if you’re a first time buyer. It is important to put together a team with experience that can help guide and protect you through the process. Remember, you are putting your life savings down, possibly every asset you own and why wouldn’t you want help protect them? The amount you pay for the team is minimal in comparison to the value you get to ensure things are done correctly. The last thing you need as a new owner is to deal with legal fees to correct a mistake that could have been prevented in the first place.)
Today, my husband and I work together to run our new tax company. Before taking on the business, we knew it might be difficult working together since we are married. We defined and outlined our roles and tasks that we are each responsible for, although at times the lines can be blurred when you are married. We are active owners and meet daily to discuss any pressing matters and to set goals for the day. We revisit our marketing strategy and discuss ideas on how to grow our business. We are finishing out our second season and are happy to see the hard work we have put in is showing an increase in revenue for year 2. Our first year was very difficult as we were new to the business and had inherited a few problems including a non-productive general manager. We ended up having to let her go for several reasons and were frightened that we would regret the decision. However, my husband and I knew she was toxic for the organization and decided to bite the bullet and make the difficult decision. We also had to do some staff clean up in a couple of our busier offices and hired and trained several new team members. Despite the staffing challenges, we ended the first year on track with the prior year revenues and that was our main goal. Additionally, we noticed our team’s moral has increased since they no longer report to the old general manager which reinforces our decision of letting her go. We look forward to wrapping up year 2 and have set new goals that we will implement from the lessons we learned this past year.
(Lesson 4: Never be afraid to make difficult decisions if you know it is in the best interest of your business. Get rid of the toxic people in your organization, if need be. You will immediately see the difference in the working environment which ultimately results in happier staff, happier customers, and increase revenues. Last, if you decide to go into business with family, you need to treat it as a real working relationship like you would if you were just partners. Define your tasks and roles and hold each party responsible for those items.)
In closing, I would like to circle back to the first question in this article. Do you want to be a business owner? My response is yes. It is a hard job but one of the most rewarding things you’ll ever do. You are expected to make many financial decisions daily that not only impacts your life but your company, family and employees as well. You work long hours in exchange for the freedom of being able to pick a time in the middle of the day to run a personal errand. Your phone never stops ringing and the customers are very challenging at times. You have the stress of knowing everything you do and all the decisions you make impacts the future of your business, yet, you have the privilege of seeing the hard work paying off. That’s why I love being a business owner. I can see the results daily. I hope this article was helpful and it gives you hope as you take the path of being an entrepreneur. Thank you and I wish you all the best of luck.