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buying then reselling a business

Can a person buy a business at one price then turn around and sell it at a higher price to someone else. Also can you use angel money from investors to purchase that business. thank You.

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Franchise Advisory Group

Carl, I have flipped several businesses and to answer your question, it is absolutely something you can do. The key to the success of this process is to find a businesses where you know you can increase the value of the businesses. Typically I look for businesses that are under performing due to neglect of the current owner , or other factors. You also have to know when you'd like to exist out of that businesses. Typically I look for a one year exit, however you have to be prepared to hold on longer if needed, so there is some risk involved with this type of transaction. I wrote a blog about the subject a while ago and you can read it by going to my website.

Jul 13, 2009
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The BAF Group LLC

You have to ask yourself, in what kind of circumstances would you be able to buy at a discount sharp enough to provide yourself with a profit, the angel investor with a return on his/her investment, and still have a price that is attractive enough to the eventual Buyer to think this is worth his investment, as well? Peter Ireland (writer below) is correct, in that the amount of time and what you could do to add to the value are key.

Carl Icahn does this with some frequency. However, he does this with mammoth corporate conglomerations, where he tears the assets apart and sells them individually. The parts, in these cases, are worth more individually than they are in a singular entity. With small business, this is impossible. And since you are asking this question, in a public setting like this, voicing the need for an angel investor to accomplish your goal, it is assumed you are not in that league.

And by the way, Carl Icahn - who is a bit of a personal hero - is probably one of the most sued people in the Country. At his level, being sued is simply a cost of doing business. In small business, that would not be the case. Being sued is like playing horseshoes, in that "close enough" still costs you a bundle; even if you win your case, the cost of defending yourself can cost far, far more than the profits of this kind of high risk scenario.

There was one example that comes to mind. A Buyer found out the Seller had a terminal disease, and took advantage of the situation by telling him that the Buyer could settle in thirty days, but to do so, he wanted a very deep discount on the price. About a week before the proposed settlement, the family of the Seller found out what was going on and threatened to sue. Imagine going into a court and trying to defend yourself against charges that you were dealing with a desperate, terminally ill man, possibly under the influence of drugs that might impare judgement, all in the interest of your own, personal gain, to the extreme disadvantage of a man on his deathbed and his berieved family...

Who is going to win?

Are there other circumstances where there is less risk? I can't think of any, off the top of my head. I would go very carefully into a deal with this kind of philosophy.

Jul 13, 2009
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The BAF Group LLC

Carl Icahn - a personal hero of my, in a sense - does that with some frequency. He is also one of the most sued people in the Country. Peter Ireland (below) is right: What added value can you bring to the Company, in the short term, that would make it worthwhile for the person to whom you sell the business?

It would seem that there are two obvious reasons this can happen. One is to do what Icahn does, which is to tear the assets apart and sell those at a higher price individually, than they can be sold as a singular entity. With small business, that is impossible. He deals with huge corporate congolmerations. Since you are asking this specific question in this context, it is assumed you are not in that league.

The other option is if you are buying at a below market level. How does that happen? The Seller is at the verge of death and needs to sell at a radical discount? Unless you are specifically trying to cheat someone, I cannot think of any other, practical scenario where a business would be sold at a discount sharp enough to "flip" it.

Either way, it would be an exceedingly risky scenario. Using the deathbed example, if the heirs to the deceased realize the Seller got less than "market", you would probably open yourself to a very lucrative (for the heirs) lawsuit. And lawsuits are like horseshoes, in that close enough costs you a bundle. Even if you win, frequently the cost of defending yourself would cost far, far more than the risk would seem worthwhile.

Jul 13, 2009
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How to Buy a Business

Carl, it's been done but to answer your question, we'd need to know how fast of a flip are you thinking? Is it a 6 month project? One month? 24 hours? Obviously, to make it worthwhile you would have to first create some serious additional value in the business and that takes time. In a typical situation, you're looking at least 1 to 3 years of hard work to get a significant valuation increase to justify a sale. These increases don't appear over night.

Angel investors don't have any time restrictions on their investments. Their goal, like everyone's, is to make money. If they could realize a significant ROI in just 30 days with you, they'd do it. After all, what could be more attractive than a good ROI and fast exit? Nothing.

The real problem is that angel investors aren't really into helping people buy companies. They invest in technologies which they thoroughly understand and can help succeed in the marketplace.

Your best bet is family and friends who trust and believe in you.

Jul 12, 2009

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