In one of my previous posts, I mentioned that there are four ways in entering a business: Starting your own from scratch, buying an established business, buying a business franchise, and becoming a distributor of a business.

Let us tackle first here “buying a business”. Buying a business eliminates the aspiring entrepreneur the hassles and headaches of a start up business. Before you buy an existing business, Kiyosaki recommends to weigh its pros and cons first:

PROS of buying a business:

No long and risky start up period
All systems in place
Faster route to profitability than with a start up
Existing customer base
Existing goodwill of the business

CONS of buying a business:

Potential competition by the seller
Sticky personnel issues such as firing people and changing the way they work
Existing ill-will of the business

If the pros win, then you’ll need to proceed with caution. Kiyosaki lists some steps that will help you determine whether the business, once bought, is going to stay afloat:

  • First, ask why the seller is selling. It may be the most important question you ask. Talk to customers. Are they satisfied?
  • Do a background check on owners and key personnel. Have they left a trail of unpaid debt, or do they offer you a clean slate?
  • Inspect all recent tax returns, and don’t take any financial statements at face value. It is best if the financial statements are accompanied by an audit letter from a reputable CPA firm; however, many businesses may not have audited financial statements. In this case, it may be worth the expense to have a CPA review the financial records on your behalf.
  • Search for hidden liabilities that don’t show up on the balance sheet, and consult with an attorney. When is the office lease up, and will the rate be raised thereafter? Has the value of receivables been overstated? Will you be inheriting employee obligations? Litigation?
  • Assess the true value of the assets. These include hard assets such as equipment and inventory as well as soft assets such as the company’s name and reputation. Review the intellectual property that you will be purchasing along with the business and make sure it is transferred properly to you as the new owner.
  • Find out whether industry competition has recently heated up—and whether that’s the reason the owner is selling.
  • Consider asking for a non-compete clause so the seller doesn’t open a similar business and “steal back” the customers and goodwill you think you’re buying.

Successful businesses do not come cheap. The current owners have worked hard to build their profitable enterprise, and the price will reflect the lessened risk that such success represents. If you have the capital to buy the company, the skills to run it, and the stamina to stick with it, you may well be on your way to financial freedom.

Remember, however, if you buy a business that requires you to be there, you’ve purchased a job—an S business. When you can hire a manager or president to run it and your presence isn’t required, then you’ve turned that S business into a B business. This is the path many B businesses have taken. They start with an S business and work their way to profitability until they can hire a manager or president to run it turning it into a B business.

As an end, I would like to leave another Rich Dad Tip:

“In moving to the B quadrant, your goal is to own a system and have people work that system for you. Think of the system as your bridge to financial freedom.”

Source: Robert Kiyosaki’s Coaching Program

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Filed under: Entrepreneurship • Investments

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