Entrepreneurs need their own team to navigate the sales process.
posted by: Lauren Altschuler
Jan 9, 2020 9:39:00 AM
If you are trying to decide between starting your own or buying an existing business this blog is a must-read. Below are a few of the many reasons buying an existing business may be the better decision, along with a couple of tips that potential buyers should keep in mind before making a purchase.
Skip the startup work: Developing a marketable idea and getting it off the ground is the hardest part of starting a new business. Before selling goods or services, startup entrepreneurs need to spend a great deal of time and money on equipment, paperwork, permits, process and procedures. After setting up the basics, they often work 60-80 hours, seven days a week in the first year or two. As a matter of fact, these business owners may not see a profit in the first few years of business. Starting a business is risky. From IBBA's blog, "according to Michael Gerber, author of The E-Myth Revisited, 40 percent of new businesses fail in the first year, and 80 percent fail within five years".
When acquiring an existing business, buyers avoid the startup costs and activities associated with starting a business from ground zero, and can instead get right to work improving and growing the business. Buying an existing business means obtaining a knowledgeable staff, saving time and money to find and train new employees. When acquiring a successful business, buyers are paying for a proven concept and an existing customer base, avoiding the need to generate initial interest in the business. This translates to a significantly lower risk. Rather than relying on speculation, projection, and estimates, buyers can make informed decisions based on the business's sales and profits. Even if a business' records are lacking in some areas, buyers will ideally know whether or not they can improve the business with their unique skills, experience, and ideas.
Easier to finance: While buying an existing business can sometimes appear costlier than starting a new one, buyers are actually more likely to receive better loan terms from lending institutions when buying an existing business. This is because banks are able to see the historical earnings of an established business, and are more likely to help fund the transaction. When buying an existing business, buyers can use the cash flow of the business to pay down acquisition costs while also receiving a salary. The money saved by buying an established business can then be used to grow it.
Find the right fit: Since buyers are taking on someone else's established concept rather than implementing their own new idea, it's important for them to locate an existing business that is the right match for their strengths. Buyers can begin by considering their own talent, interests, and experience, along with the time they are willing to put into a business. In addition to these key considerations, buyers will need to find a business located close enough to manage it.
Don't inherit existing liabilities: Business owners decide to sell their businesses for a number of reasons; for example, many sellers have simply reached personal goals, are ready to retire or need to relocate. While Business Advisors do the initial work of gathering financials and determining an opinion of value based on industry research and comparison of similar transactions, buyers still need to perform due diligence in order to understand exactly what they are taking on. During the due diligence, buyers will need to ask questions and obtain documents from the seller to verify the business's profitability and ability to continue being profitable by looking at client contracts, expenses, employee non-competes and having an understanding of cash flow throughout the year. Creating a business plan, proforma, and working with an established Business Advisor will help buyers make better decisions. A great resource is Walter Deibel's book, Buy Then Build.
Before starting a search, buyers should considering taking the time to find and develop relationships with experts. This would include a business broker, banker, financial advisor, accountant, and attorney, who can help buyers find the right business, secure financing, help with due diligence and review or structure the offer. If you are interested in buying an existing business, start the process by contacting Transworld Business Advisors of Minnesota to schedule a meeting with one of our expert Advisors.