Is now the time to buy a business?November 12, 2008: 8:47 AM ET
A downturn can be a great time to become an entrepreneur - but only if you're prepared, financially and emotionally, to wait out the economic turmoil.
Charlene, Fort Myers, Fla.
I'm interested in buying a small pack-and-ship company. It's for sale for $70,000 with a gross profit of $245,000 a year. As an owner, after making all my bills and deductions, I would make about $60,000. My husband and I want to run it ourselves, with no employees, but we are worried: Is buying a business in the current economy a smart idea?
By Kathleen Ryan O'Connor, Fortune Small Business contributor
When Ken Proskie started his occupational health and safety consulting business in 2004, the economy was emerging from its post-Sept. 11 downturn, but downsizing and offshoring were still pummeling Main Street.
Proskie knew the problem too well: The impetus to strike out on his own came from being laid off after a 30-year corporate career in the field.
The economy seems even worse off now. What's his advice for someone pondering the same plunge today?
"It may sound philosophical, but sometimes a crisis is the biggest chance to find out who you really are," says Proskie, who lives in Evanston, Ill.
Convinced that his advance research was sound and that a clear need for his services existed, Proskie went in prepared to wait out the economy. He planned for a stretch of red ink before he'd see profits.
That approach was smart, experts say. Anyone thinking of starting a new business or taking over an existing one in late 2008 should keep that in mind and be prepared for a potential sales decline.
But above all, finding financing is going to be the top challenge. As banks pull away from lending to large, established companies, you can only imagine what they're telling unproven business owners just starting out.
That's not to say the dollar spigot is closed off completely, but the days of easy money are long gone. A strong personal credit rating is mandatory, but it won't be enough. Be prepared to front plenty of cash and collateral. Many entrepreneurs report that business loans are impossible to get unless they back them with their house.
"A few businesses that I've talked to over the last couple of weeks have had lines of credit canceled, even though they've been up to date on them," says Larry Bennett, a professor of entrepreneurial practice at Syracuse University's Whitman School of Management in New York. "That's a little bit concerning to me, when even those with high creditworthiness are having problems."
Still, there are opportunities. For those who come prepared, now can be a good time to launch - your rivals will be facing their own challenges and sales struggles.
"If you've done your homework and you see there is still an opportunity or a window of need, and your competition is not terribly with it, it can be a better-than-ever time," Bennett says. "But take the old saying: Take whatever you are forecasting for money [needed to get started] and double it. I'll say, take what you are forecasting for money and quadruple it."
Small business coach Jeff Williams of BizStarters, which specializes in the over-50 entrepreneur, warns potential entrepreneurs to be prepared, financially and emotionally, for a long stretch of economic turmoil.
"It takes footwork now and that eliminates a certain subcategory of buyers right there. This is not for the faint of heart," he says. "You are really going to have to look three years into the future. That's what smart buyers have always done."
One bright spot to consider: The economic crisis has some older entrepreneurs with solid businesses thinking it's a fine time for a graceful exit. And with the credit crunch, sellers might be willing to offer private financing.
Above all, Williams says, you need to take a long, hard look at the value of the business you're considering starting or buying. Does it fill a fundamental need?
Take industrial supplies. "Even if the factory goes from three shifts to two, they still have to buy these things," he says. "They still have to keep the plant running."
And don't be afraid to think outside the box. Even lawn care, a seeming luxury, can be a prosperous business in a downturn, Williams says. Downsizing means everyone is left working longer hours. Envision the suburban dad working from 7 am to 7 pm six days a week - he isn't going to be spending hours tooling around on the Cub Cadet anymore.
Sticking to the fundamentals was the key to Proskie's eventual success with his firm, Compass Health and Safety.
"The first year wasn't great," he says. "I had to have the resources behind me to survive [that initial loss] in income. I tried to position myself smartly. Why would you want to use me - a small fish in a big pond? I marketed myself as a seasoned professional and, probably more important, was the value proposition. I can do it for less, with better quality and better service than you've gotten in the past."
Eventually, that approach built up his client base. After all, even in a recession, work still has to be done.
One key thing to keep in mind: In any business climate, boom or bust, you can't let your emotions get the best of you.
As Bennett puts it: "I tell my students, fall in love with business, just don't fall in love with the business."