You want to own your own business, be your own boss, build something great, make your mark in the business world, and have the financial freedom, lifestyle, and benefits that go along with business ownership. Entrepreneurs and small businesses are the backbone of the American economy, and business owners make a great living at it.
As with any investment there are inherent risks involved in owning your own business and these risks are different with regard to starting a new business vs buying an existing business. Before you take the plunge, consider these factors:
The Case for Buying a Business
A surprising fact many entrepreneurs are unaware of is that there are thousands of existing businesses for sale and you don’t have to build one from the ground up. Equally surprising is the fact that businesses for sale rarely sell for financial reasons such as declining sales or profitability problems. Most businesses sell for reasons of a personal nature such retirement, health issues, or the owner is just burned out after running it for 20 years. These are viable and profitable businesses with employees and infrastructure in place. Most importantly, these businesses have an ongoing stream of cash flow and in many cases this cash flow is substantial.
One should not underestimate the benefits of immediate cash flow. Buying a profitable business with established customers and steady cash flow substantially reduced your risk and essentially eliminates the startup period where a new business burns through cash every month.
All of these factors are already in place when you buy a successful existing business that can be transferred to a new owner. The business is proven in the marketplace, has revenue and earnings, which means there is immediate cash flow and an existing customer base to build on. You will still need working capital to operate the company, but you won’t have months and months or negative cash flow while you are starting up and launching a new concept.
Vendor relationships are established in an existing business, employees are trained and knowledgeable about the business, and the business is already operating. Office equipment plus any additional capital equipment is transferred to the new owner as part of the sale free and clear of any liens.
Many small and mid-size businesses qualify for SBA financing of the business acquisition. If both buyer and the business qualify you can purchase a business with 25% down, or even 15% down if the Seller will carry a Seller Note, and 10 year financing terms. Financing terms like this are simply not available for start ups.
There are many hurdles that a new business has to overcome whereas an established business that has already overcome these challenges and has been proven to be successful.
What about Starting a Business?
An important factor to take into consideration when starting a business is that a majority of businesses that fail do so within the first five years of starting. There are various reasons that this happens most of which are already handled when you buy an existing business. When you’re starting from scratch your business is unproven, there are no customers, no vendor relationships, no employees, no inventory (if needed), and no equipment,office or infrastructure in place. These things take both time and money to put in place and it is critical that you do not underestimate how long it will take and how much it will cost.
Working capital and a cash reserve fund is another critical aspect of your start up plan. The most common cause for new businesses failing is they simply run out of cash and don’t have sufficient capital to survive while building the business. In most cases when you start a new business there are no customers eagerly waiting to buy your products or services on day one and it takes time to build your customer base and get your name out there.
What about Franchises?
Buying a franchise does reduce the risk of starting your own business and franchises do offer procedures, systems, and a turn key approach to opening your new business. With that said, the start up costs are still substantial and nearly always significantly underestimated. And while your new franchise brings brand recognition, there is significant time required to build your customer base and sales, and during this period your business will be losing money every month (this is where the start up expense is nearly always underestimated).
If you have your heart set and mind made up on a franchise something to consider is buying an existing franchise location. Existing franchise locations are for sale from time to time and the cost of buying an existing location vs the cost and risk of opening a new franchise is usually a good deal less costly.
Read more about the best times to buy or sell a business.
Financing the Purchase of a Business
Financing is something that is often overlooked or many just assume financing is not available. While financing is seldom available when you are starting a business, it is available when buying an established business that has good financials. SBA loans are the most common financing for small business acquisitions with funding up to $5 million. In some cases SBA financing is available for new franchise purchases.
In the case of a start up, your only financing alternatives are personal funds, personal loans (e.g. HELOC), credit card debit (very expensive), friends and family.
Whether or not you buy or start a business you always need working capital to keep the business and yourself going. Working capital is often underestimated and this is the most common thing that gets entrepreneurs in trouble. The advantage of buying an ongoing business concern is that on day one you have immediate cash flow whereas with a start-up it will likely take months before you recognize a profit from your business.
Here are some resources for getting started on buying a business:
“Own Your Future, Straight Talk about Buying a Business and Building Your Future” book by William Grunau
Business for Sale Websites
If you make the decision to buy a business there are several sites you can checkout for businesses for sale:
or check out our available listings at OrangeCountyBusinessBroker.com/businesses-for-sale/