Building your own business is hard work. That's why many entrepreneurs choose to buy an existing business rather than starting from scratch. But how can you avoid sinking all your resources into a business that is sure to fail? What should you look for? What should you avoid?
This article will help you evaluate the advantages and disadvantages of buying an existing business, as well as provide you with some tips that should help guide you as you make what is bound to be one of the most important decisions you will ever make.
Good reasons to buy...
There are several advantages to buying an existing business as opposed to starting your own. Most obviously, you save time. Suppose you want to start a retail business. It may take months for you to build an adequate inventory. Opening your own restaurant means creating your own recipes and menus; building a manufacturing business from scratch can take years. But when you purchase an existing business, the "dirty work" has already been done.
If the business you want to buy offers a product or a service, you can evaluate the operating history and better understand the demonstrated market. Are people buying the product or service? What are they willing to pay? What type of advertising has been most effective? When you start your own business, it can take many years of trial and error to establish your market. Purchasing a business can alleviate this process.
Buying an existing business will allow you to evaluate its cash flow and operating expenses, giving you a better idea of how much investment capital you will need. When you start your own business, these numbers are much more difficult to estimate, and investors consider start-up businesses higher risk than existing ones with operating histories and proven track-records.
Perhaps the biggest advantage to buying over starting a business is the existing business's potential. You may see growth opportunities the current owner doesn't, or maybe you have a superior business plan. Your enthusiasm and excitement for the business can revive it and help it to grow, and often relatively minor changes in advertising, personnel, or procedure can greatly improve profitability.
But, there is a downside...
Of course, there are disadvantages to buying a business, and you must weigh them seriously against the advantages. For example, unless you plan to replace all of the existing staff, you will have employees working for you whom you did not hire and whom you do not know. They may be resistant to the changes that you make. You may find it difficult to motivate employees who have become complacent under the old management or that there are personality conflicts between new and existing employees.
Evaluating the current operations of any business can be a daunting task, and when you consider buying you must do this thoroughly and with diligence. Heath inspections, building inspections, financial analysis - the list goes on, and you must be prepared to do it all before you sign the dotted line. This can become costly, especially if you are comparison-shopping.
Remember, the seller may try to downplay any business problems. He or she may not be honest about operating cost or profits, and there is the possibility that the "books are cooked." That is why you must have a capable financial expert explore all records thoroughly.
Additionally, make sure you understand the current customer base. Financial records indicate only the number of sales or clients, not the level of customer satisfaction. What if you inherit a dissatisfied customer base? Or, conversely, what if the customer base purchases the product or uses the service simply because they have a relationship with the current owner? This problem can present itself particularly if the business you purchase is a family business, a small-town business, or in many cases, both.
Then, there is the issue of lower potential for returns. Whenever you invest in anything, regardless of what it is, the general rule is less risk equals lower returns. Buying versus starting your own business is no different, and although every situation is unique, typically buying a business brings a lower return on your initial investment than starting one from scratch.
And last but not least, buying a business means you miss out on all the excitement that comes with starting a business of your own. Depending on your personality, you may want to create something unique, unlike anything the world has ever seen. When you purchase an existing business, you have to ask yourself if you are willing to take on something someone else has created. Will you be satisfied taking the reins? Or do you want to buy your own horse, build your own carriage, and be in control from the get-go?
Should you buy a franchise?
Franchises offer their own set of advantages and disadvantages. When you buy a franchise, you are purchasing a recognized brand name without an existing customer base in the area. So, unless you purchase a franchise that is already up and running, you are dealing with a mixture of issues.
Buying a franchise can be a lot like starting your own business. You will likely have construction or, at least, remodeling costs. However, unlike starting your own business, you are not on your own. You will have a parent company to instruct you through the start-up process, and later to guide you in your operating procedures. But ask yourself: are you willing to take direction and to follow procedures you did not create? Oftentimes, entrepreneurs are entrepreneurs because they want to be independent and will resent not being in total control.
However, some business owners find franchises offer the best of both worlds - the independence of running your own business without jumping into the complete unknown. Frequently, the brand-name recognition and the lower wholesale purchasing costs associated with running a franchise appeal to new business owners. Just beware of multi-level marketing and pyramid-type franchises.
Tips for moving forward
If you've already decided that purchasing a business is the right choice for you, you may still have questions. Namely, how do you proceed? Here are some suggestions to help you start on your path to profits and success.
- Consult a business broker. Business brokers, like real-estate agents, have expert knowledge of the buying and selling process. They also have real-world experience and can offer good advice. But beware! They typically get paid commission, so you need to find one you can trust.
- Check the credit history. The second edition of Small Business for Dummies recommends that you run a credit check for the person selling the business. Why? Non-payment of bills may indicate hidden problems with the business.
- Talk to the customers. This will give you a feel for the business itself.
- Talk to the owner. The more you chat with the current owner, the more information you are bound to get about the business and why they are choosing to sell.
- Talk to employees. This will help acquaint you with the culture of the company, the attitudes of employees, and ultimately with people who may soon be working for you.
- Evaluate, investigate, research, and explore. Look into every nook and cranny, figuratively and literally. The more you know about the business, the more educated your decision whether to buy or not will be. Most importantly, take your time.
- Negotiate the best deal possible. Ask the current owner to throw in equipment, office supplies, even company vehicles. If he or she is eager to sell, you may end up a great many extras you might otherwise have had to purchase separately.
- Make it legal. For your own protection, don't try to complete the sale without the help of your tax advisor and a legal advisor with experience in small-business transactions.
You bought the business, now what?
Make sure you disclose the transfer of ownership to all the business's creditors. If possible, try to arrange for an article to be published in the local paper. This will accomplish the two-fold task of making the transfer of ownership public and can serve as free advertising for the business itself. Inform employees of your business plan, but take time to implement major changes.
Last but not least, try to keep in touch with the prior owner. You never know when you might have a question or even need advice.
Buying a business is hard work, but with patience and good legal advice, the hard work should go hand in hand with satisfaction and success.
This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.