Buying An Established Business: Interview

Are you wondering about buying an established business?

Jen and Amber team up to answer some of the common questions people have about buying an existing business.

Since leaving the restaurant, Jen opened a food truck and then a coffee shop, both from “scratch”, giving her insight into the pros and cons of buying an established business over starting fresh.

If you’ve ever browsed the classifieds wondering if you should buy a established business that’s for sale, read on!

Interview:

What did you like about buying an existing business?

Amber:

Having an existing customer base and reputation gives you a foundation to work from. From here you have the opportunity to bring in new customers, or to win back previous customers. If someone didn’t find value in the experience they had the first time they might be willing to give you, as the new owner, a second chance.

Jen:

Buying an established business was appealing for a few reasons. The restaurant we bought was highly rated on TripAdvisor and Google, and was very well known. As well, the restaurant was in a very visible location on the main highway. I saw value in the location as well as the reputation.

It was also appealing that it was already operating. We had to switch over business licenses and health inspections, which took about a month. Otherwise it was simply a matter of getting the keys, putting some of our personality into the place (paint, décor, a few tweaks to the menu) and then opening the doors!

What was challenging about buying an already established business?

Jen:

Since I had already worked at the restaurant for two years, I had some strong opinions about what I liked and what I wanted to change. I felt that since the restaurant was so well loved and known, any large changes off the bat would not be well received. It took about two years before we had the place operating exactly like we wanted it to.

Except I could never stop making the “legendary” ribs the restaurant was known for. The ribs had been a staple for 15 years, and people came religiously for them. That was a hard pill to swallow, but that’s the price you pay for buying a beloved established restaurant.

Amber:

100% what Jen said. You spend a lot of money to buy an existing customer base, and if you want to keep them happy you have to tread carefully. Starting a new business is a huge risk, but buying an established business means that every tiny, little change you want to make is a huge risk. Taking ribs off your menu might sound like it wouldn’t be a big deal, but we knew it would be a BIG deal.

And speaking of the money: like with anything in life you are paying for the name. You’re paying for that existing customer base. You might be buying some assets, but the real cost is the goodwill. Buying an established business with a good reputation isn’t cheap. The previous owners put a lot of work into that reputation and they want to be paid for that. Our breakdown was something like $20,000 in assets, and $90,000 in goodwill. Ouch. And then factor in the cost of any changes you want to make.

What are some questions to ask the seller?

Amber:

I would want to know right off the bat who is making this business run. I know who owns the business, but who is the one actually keeping the ship afloat? Is this business relying on a few well trained and irreplaceable employees? Are those employees willing to stay on? Are those employees a good fit for the new direction you are heading? What happens if those employees leave? We’ve all seen businesses change hands and then immediately lose lifelong employees for whatever reason. If you’re thinking about making big changes this will affect those people as well, so it’s a consideration that you might be looking for staff. Looking for staff, and training staff. It’s a big undertaking.

Jen:

You’re going to want to see the financials for at least the previous two years, if applicable. The more information you can get on sales patterns and trends, the easier it will be to plan out your cash flow.

I like to look at what the owners wages currently look like. Depending on the company’s structure, they may be an employee taking a paycheque, or their wage might come out as an owner’s draw once all the expenses are paid. If a business profits $40,000 in a year but the owner works full time in the business and their wage is not a line item expense, they’re barely making above minimum wage (in Canadian dollars, mind you).

As well, it’s important to have a clear understanding of the key employees of the business and whether they will stay on through the sale and what their employment contracts are. You’d hate to find out afterwards that your head chef is following the previous owner to a new restaurant down the road.

What are a few things you need to have in place?

Jen:

A non-competition agreement, drawn up by a professional. To protect your investment, you should ensure that the previous owner is not going to replicate their previous business and compete with you in the same market.

As well, you’re going to need to have a serious chunk of change or a loan. As Amber mentioned above, an established business is often priced high to account for the “goodwill” of the business. You want to be able to cover this amount, plus fees for permits, licenses, and any updates you want to make.

If the business is turnkey and you get to start operating and pulling in cash right away, that’s great! I still would have enough money in the bank to cover a minimum year’s worth of expenses.

We learned this the hard way. Two months into operating, we were hit by an unprecedented natural disaster and our revenue decreased by 70%. Be prepared for anything! We were so lucky to have the support of our community and our established customer base to get us through.

It’s also important to ask if the seller is able to provide vendor financing. In situations like this, the seller will loan you some of the money to purchase the business from them. This can lower the amount of cash you need to put into the business. It also makes applying for a loan easier. It shows that the seller is confident in the future success of the business, which banks love (and you should too!). In our case, we had vendor financing for a portion of the purchase price, to be paid back after our bank loan was paid in full. Otherwise, we would not have been able to secure a business loan for the entire purchase price.

Amber:

I’m going to echo non compete. I don’t care what your relationship is with the previous owners, I don’t care how trustworthy they are, and I don’t care that they promised they are moving to Arizona and never want to be in business again. A non compete is two fold because not only does it prevent the previous owner becoming your future competition, it defines what that means. You might not be on the same page about what it means to be in competition. It is extremely easy for people to disagree on boundaries or to brush things off as “not a big deal”. You want to be extremely clear about what those boundaries are.

What potential red flags would you look out for when buying an existing business?

Amber:

If you are buying “success” you want to look for reasons for that the “success” that you won’t be able to replicate. Is this business successful because they have shady business practices? It’s 2022 but I still know that a lot of businesses take advantage of their employees in different ways. You want to make sure that those amazing profits aren’t because they’re not properly compensating their employees? It happens and in a myriad of different ways.

Jen:

Declining sales for a steady amount of time. Are the owners selling because the business is declining? Are the owners selling and therefore, are not interesting in providing the same level of service, losing their long-standing customers?

What would you do differently next time?

Amber:

Hindsight is 20/20. If we had known that we were about to endure years of wildfires and a global pandemic, we might not have invested so much into buying the business. At the end of the day we made good choices and positive changes. It’s unfortunate that we couldn’t predict the future, but I think we had really good instincts. The sad reality is that we did everything right; we were able to survive in situations that many businesses didn’t, but we still decided that it wasn’t sustainable long term.

If I went back and did it all over again I would just have a different attitude. I would be so much more confident and less apologetic. I would take ribs off the menu and look people straight in the eye and say “we don’t do those anymore, but you know what? The food here is really good, and you are going to love it.”

Jen:

I agree with Amber that I would have made more impactful changes to the menu and style of the restaurant right off the bat. As I mentioned earlier, it wasn’t until the second year in business that we were truly operating the way we had wanted to.

I also would have negotiated the purchase price down. We were not familiar with how common vendor financing was; to us it felt very generous that the previous owners were interested in “helping” us out. In reality, the restaurant had been for sale for over three years, and it was hard to find a buyer willing to relocate to a town of 200 people. Our bank loan ended up being very high interest as the purchase was largely “goodwill”, and not tangible assets that the bank could have seized if we defaulted. I would have either pushed for a larger amount of vendor financing to lower our interest costs, or negotiated the price down.

Would you buy an already established business again, or would you start new?

Jen:

Natural disasters and global pandemics notwithstanding, I don’t regret buying the restaurant. We were in our late twenties and new to business ownership. It was a great way to jump in and learn the ropes from the previous owners, while bringing in revenue on day one.

However, I have loved starting two businesses from scratch now. It was fun to come up with names, logos, menus, design, etc. all from my own vision. It was harder in many ways, but also more rewarding to create something from nothing.

I would consider buying an existing business if it was more hands-off, but in food service specifically, I feel like you have to have passion for what you are doing. I’m not sure that I could have that passion again for someone else’s creation.

Amber:

I would buy an existing business under the right circumstances. For me I would be hesitant to buy a very established existing business if I had serious thoughts about how I would want to change it. It is hard to justify changing something that is already working, but I need to feel like my business is MY business. You can get trapped in doing something you hate because there is no resistance. That’s how you end up smelling like pork every day.

I would also buy an existing business if someone was trying to make a quick sale and walk away. This sounds cutthroat but it happens. In this scenario you aren’t really paying for the name, you’re really just paying for the assets and the leg work. Then you get to give the business the full makeover. I’ve seen this happen successfully and you probably have too!

Are you ready to buy an established business?

Only you can make the decision whether or not buying an established business is right for you. Be sure to do your research, know what you are getting into, and be prepared to walk away if it’s not the right fit.

Above all, our biggest piece of advice will always be: do not let fear hold you back. You’ll never be 100% ready, 100% prepared for anything, and 100% confident.

Do it anyways.

Whether you choose to start your own business from the ground up, or buy an established business, with determination, resourcefulness, and some luck, you can own the business you’ve been dreaming of.

Questions? Leave us a comment or send us a message on Instagram. We would love to connect with you!