By Trent Lee, the recipient of the award as the No. 1 business broker in the country by the International Business Broker Association (IBBA).
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When someone says they want to go into business for themselves, often the first things that come to mind are cash-strapped 80-hour workweeks and the high failure rate of starting a business from the ground up. But going into business for yourself doesn’t have to start this way. There are real benefits to allowing someone else to put in those startup hours and prove the concept and then stepping into their role.
In this article, we will explore the advantages and disadvantages of buying an existing business. These will vary depending on your skill set and the business you consider purchasing, and your success isn’t guaranteed, but the failure rate of companies younger than five years is so high. You need to carefully weigh the pros and cons of buying an existing company.
Pros
1. It’s A Proven Concept
One of the biggest challenges when starting a business is the unproven concept. How will the market react? How will you attract customers? And more importantly, can you do so predictably and profitably? Finding an established company with consistent revenue and profitability may be the easiest way to go into business for yourself.
2. Financing Is Often Easier
Traditional bank loans typically have underwriting criteria related to time in business and debt service ratios that by their very nature require historical revenue. It is often easier for a business to get financing when it has a proven track record. Couple traditional bank financing, which often includes working capital, with some portion of seller financing, and a bank could help you buy an existing business with as little as a 10% down payment.
3. You May Save Time And Money
Starting a brand-new business is often difficult from the standpoint of time and money. You need the time and money to perfect the product or service and establish a proven marketing and customer acquisition model. An existing business should have already tested all the different marketing channels and hopefully will have already found what works and what doesn’t. This can allow you to go into the business and increase what is already working.
4. Access To A Database Of Existing Customers
An established business will already have a database of customers, and as a new owner, you can turn your attention to establishing deeper relationships and further monetizing them. It’s almost always cheaper to work with existing customers rather than acquiring new customers. At the same time, you can continue to advertise the business and grab new market share.
5. Immediate Cash Flow
Unless you have significant capital, building a business from the ground up can take its toll. It’s one thing to come up with a novel business idea with some college buddies and start up a company from your dorm room. If you are in this situation, a startup can be a good option. But if you have financial responsibilities, such as a family to provide for, buying an existing business can give you the immediate cash flow you may need.
Part of the process of buying an existing business is doing your due diligence and your own financial forecasting and analysis. Determine what livable wages you need, and then make sure that the business has enough cash flow to support you and continue to fund operation, debt servicing and growth.
Cons
1. It May Be Hard To Know All The Facts
It’s unfortunate, but not everyone is as honest as we want to give them credit for. For this reason, you need to really dig into the business’s financials and ensure that the owner is being forthright and upfront about everything. If not, you run the risk of purchasing someone else’s problems. You may benefit from hiring professional help for this.
2. Potential For Old And Outdated Equipment
Often businesses are sold because the current owners either can’t or won’t put in the time, effort and money to continue improving and growing — this includes taking care of equipment. Part of your due diligence should be inspecting all equipment and machinery. Make sure things are in good working order and haven’t been neglected.
3. The Existing Company Culture May Not Be The Best
Employees and company culture can often make or break a business. Make sure you assess current employees and the state of the culture so you know whether you’ll need to take steps to improve.
4. Past Due Payroll Or Sales Taxes
In my experience, payroll and sales tax payments are often missed prior to and during changes in business ownership, and the new owner can get stuck with them. Make sure that you have clearance from your local tax jurisdiction to avoid any type of successor liability, even if the sale is an asset sale. Be sure that you are purchasing a business without any unknown liabilities.
5. You May Lack Industry Experience And Expertise
To step in and not only continue to maintain business success, but also take it to the next level, you ideally want to have expertise and experience in the business niche. As a business broker, I get calls weekly from people wanting to buy a business — anything that makes money, they say. I don’t recommend this approach.
Buying an established and profitable business could be a secure and quick way to get into business for yourself, but you’ll have to weigh the pros and cons of each scenario and make the best decision for yourself and your future.
