Buying an Existing Business or Starting a New One
Why Should Buyers Buy an Existing Business?
Advantages of Buying an Existing Business
There can be significant advantages to buying an existing business versus starting a new one. What better way to maximize the probability of success than to review actual operating results rather than projections? If a business has been successfully owned and operated by the same owner for some years, and if that business has been the source of income for his family, you can reasonably conclude that the business will be viable long-term under another competent and qualified owner.
Here are a few of the many other advantages of buying an existing business:
- Immediate cash flow. The cash register starts ringing the first day you take over, just like it did the day before for the seller of the business.
- Trained employees. When you take over the business, you will typically have a team of trained employees to run the business.
- Established suppliers and credit. For the most part, existing suppliers will continue to do business with you without missing a beat. They do not want to lose your business; they want you to succeed and purchase additional goods and services from them!
- Established customers and referral business. Your customer base is already in place and accustomed to doing business with your company. Assuming you continue to deliver the same (or improved) levels of service, they should refer additional customers your way.
- Existing licenses and permits. In many cases, all you have to do is transfer the licenses and permits to your name. In those cases where you have to re-apply for a license or permit, you have the comfort of knowing that the business, in its current location, was approved for the license or permit (for example, a liquor license for a restaurant).
- Training by the Seller. In addition to the trained employees, you will receive training from the seller on how to operate the business. You will be introduced to customers and suppliers and will get the benefit of the seller’s extensive experience in running the business. You will not have to make the same mistakes the Seller made!
- The availability of owner financing. Over 90% of the businesses sold by Sunbelt Business Brokers have a portion financed by the Seller of the business.
Choosing The Right Business
Despite the many advantages that purchasing an existing business offer, a strong financial and operational track record alone is no guarantee that you will experience similar success. Choosing a business that fits your interests, background, and experience is of paramount importance. By way of example, you may not want to purchase a hospitality business if you have no experience in dealing with the public, or an engineering business if you are a pastry chef. Below are some suggestions to help you successfully locate a business that suits your background, skills, and desires.
- Choose a business where you have an advantage by way of either qualifications or experience. Business is highly competitive, and you need to be at least as good as your competitors.
- Choose an occupation that you enjoy. Small business ownership often involves long hours, and requires great enthusiasm to motivate staff and deal successfully with clients. This can become very tedious if you are not happy with it.
- Check the Seller’s reason for selling. There are many legitimate reasons for selling a perfectly good business, such as retirement, marriage or partnership difficulties, health issues, other business interests, or even just simple “burn-out”. But sometimes, there may be other reasons, such as impending problems with a lease, technology changes, new competition, demographic or infrastructure changes, obsolescence, impending major capital outlays… the list is infinite.
- Understand clearly the nature of the business, and how much capital is required to run it. In addition to the cost of purchasing the business, you need to have sufficient working capital to finance inventory, accounts receivable and overhead costs. Working capital requirements differ substantially between retail, wholesale and manufacturing companies.
- Understand the cash flow characteristics and any seasonality. A year-end profit does not necessarily mean that there will be cash available at critical times to meet necessary costs, such as interest, taxes, and your living expenses.
- Ensure that you have the means to purchase, operate the business, and fund any planned growth or development.
- Try to get to know the Seller, to gauge whether you can successfully “fit into their shoes” and run the business at least as well as she or he did.
- Try to meet the key employees to make sure they intend to stay, and that there will be no major personality clashes. In many cases, Sellers will not want you to talk to the staff until negotiations are at a fairly advanced stage. If this is the case, you may wish to include appropriate provisions in the purchase agreement.
- Avoid major changes to the business during the transition period, unless you are very sure of what you are doing. A smooth changeover with minimum customer impact is the usual road to success.