Do you plan to buy an existing business? Do you plan to start your own business? There are pros and cons for each of those options. If you do an analysis, you’ll learn what many seasoned entrepreneurs have learned. The risk-to reward ratio is tipped in your favor when you purchase an existing business.
The benefits of buying an existing business include:
A proven concept – Buying an established business is less risky. As a buyer you already know the process or concept works. Sure, business plans and income projections look great on paper. With an existing business, you already know the actual performance of the business. You can look at the tax returns, profit and loss statements, etc.
The company’s brand – The ongoing benefits of any marketing or networking the prior owner has done will transfer to you. Existing relationships – With the purchase of an existing business, you will buy an existing customer base and vendor base.
An immediate focus – When you buy a business, you can start working immediately and focus on improving and growing the business without delay.
Trained employees in place – One of the most valuable and important assets of an existing company is the people. With the right team in place, just about anything is possible and you will have an easier time implementing growth strategies.
Cash flow – Typically, a sale is structured so you can cover the debt service, take a reasonable salary and have some left over to take the business to the next level. Start-ups could take a year or more to achieve a positive cash flow.
Existing licenses and permits – Licenses can be difficult to obtain, and it may be difficult to learn all the types of licenses and permits you need. Existing businesses have learned and acquired what is required. It turns into a matter of transferring those into your name.
Training by the seller – Often the seller will help you in the learning process. You benefit from their trial and error. An owner can show you the ropes of the business, introduce you to everybody and make sure it’s a smooth transition.
The owner may provide owner financing – The seller can become your “bank.” It is difficult to find a bank to loan money to a startup because banks have little or no security available in a start-up.
Finding the right business to purchase can be a daunting task without help. Assembling a team of experts, including a business broker, an accountant and an attorney will help you avoid headaches.
Buying an existing business can be safer than starting from start-up because startups have a high failure rate. The Small Business Administration (SBA) estimates that 56 percent of new businesses fail within the first four years.
If you buy an existing business, you’ll have improved your chances of success because many businesses for sale have passed the four-year mark.
Why would someone want to sell a successful business? There are many reasons – retirement, illness, relocation, burnout, etc.
If you decide to open a business on your own, you will need to cover all the areas discussed above on your own.
You will need to find an affordable location, search for suppliers and vendors and generate your client base. Advertising will be important because you will need to get your name out and develop repeat customers.
You will probably need to hire and train your own employees and find an accountant to set up appropriate tax and licensing accounts as well as track sales and inventory.
Your attorney will be a key person in helping you review leases, deeds, zoning and licensing paperwork and other legal documents.
Of course, if you have experience in business management and knowledge in most of these areas, this may be a challenge you are up for.
When you open a business from the ground floor, you make the rules and you decide how you want it run. You would pick the stock and decide on advertising campaigns. Your business would be designed completely by you.
Dean Burnette is a business broker with Best Business Brokers. He can be reached at 912-247-3209 or dean@best-business-brokers.com.