Expanding through Acquisition | How-to Guides for running your business from Business.com

The usual roadblock for any successful small business is scale: How do I grow once the model is working?

Of course, some small businesses scale naturally through franchising or by adding sales territories. But many simply reach a natural ceiling. It would be hard — and probably uncompetitive — to start a nationwide roofing or plumbing company, for instance.

That doesn't mean there's no room to grow your small busines empire. A cash-churning small business is a great excuse to size up and buy other small companies, in whatever field, if you can find the bargains.

Action Steps
The best contacts and resources to help you get it done

Consider pricing a business through a third-party

The Web is jammed full of database-type sites that list businesses and business opportunities for sale. They tend to make their money by charging a fee for brokering the deal (to the seller) and add-ons, like financing for the buyer. Do remember, though, that these are initial asking prices, not sales.

I recommend: Among the biggest of these are VR Business Sales, BizBuySell.com, BizQuest.com, BusinessforSale.com, BusinessMart.com and Sunbelt Network.

Figure out how much you should pay

Valuing a business is a black art, to say the least. You'd need to be part accountant and at least part cowboy to get it right, since the task requires both a precise understanding of the numbers but also a willingness to stare the current owner in the eye figure out his or her real motivation in selling. Is the business falling apart? Or it is just time for the current owner to move on?

I recommend: There are a number of professional valuation services, including Nationwide Valuations and FMV Opinions and straightforward appraisers, including American Value Metrics. A bit cheaper is software designed to run numbers based on industry tables, like ValueSource and ValueAdder. BizComps compiles actual sales by sector and geography over 10 years.

Get the money in line before you negotiate

The government will lend you the cash to buy an existing business. So will many banks if you have a decent track record in business.

I recommend: Check the Small Business Administration first. BizBuyFinancing, a Web site, purports to guide you through the SBA process. Banks that actively seek small business loans include Regions, Wachovia, Bank of America, Wells Fargo, Citibank and Washington Mutual.

Feeling overwhelmed? Start off slow with some reading

Unless you have years under your belt running your own show, valuing and negotiating a business purchase can be hard to do overnight.

I recommend: There are plenty of books, Web sites and courses to consider, of varying seriousness. Consultant Peter Siegel runs a blog on buying a business. You could download Toby Tatum's e-book guide for small business buying, or Richard Parker's similar product at Diomo. Park is endorsed by Donald Trump, who is in a similar business through his Trump University. Finally, entrepreneur Ken Hendricks has a succint, refreshing take on sizing up the opportunity at Inc. magazine.

Tips & Tactics
Helpful advice for making the most of this Guide

The most commonly touted metric for value is cashflow. Watch out! The figure given is usually best year ever or otherwise inflated.
You'll need access to several years of the company's books to understand what you are buying, and even then there are big caveats: Is the industry itself dying out? Is a major competitor opening across town? Why exactly does the current owner want out?
Don't overpay for "goodwill," which is the reputation value of the business. It can be relatively simple to calculate the value of a company in terms of net assets. Less clear is the value of its brand. Banks won't loan for this cost, and you should point out that a retiring owner means goodwill walks out the door with him or her.

The official source of Expanding through Acquisition is
the Mergers and Acquisitions (M&A) page at Business.com

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