Most bad experiences with buying a business can be avoided if you spend time investigating thoroughly. Buying a business based on assumptions and emotions is a bad idea.
The conventional wisdom on the best way to avoid failing at a new business is to never start one. That is, instead of starting a new business, buy one that’s already made it through the first few years.
This advice is based on the horrendous track record of new businesses that start from scratch. If they succeed at all–and the chances aren’t good–it could still be years before an entrepreneur sees any profit.
Buy an Existing Business
Compared to starting a business, most experts believe that buying an existing company is a better bet. To support their position they cite several advantages that established businesses offer.
First of all, it’s less risky. A look at the numbers tells us that when a new owner takes over an older company, they’re much less likely to fail than if they start a completely new company.
Speaking of looking at the numbers, when you buy a business you can look at the numbers. Your purchase decision can be based on real historical performance, not predictions of possible profits.
Existing Business Advantages
Existing businesses often have already achieved a positive cash flow, something that brand new businesses find difficult. Plus, an established company comes ready-made with trained employees, cost-effective supplier relationships and a profitable customer base. Still, is there ever a time when buying an existing business is a bad idea?
Is it Affordable
If your strapped for cash, then buying an existing business might not be an option for you. Established companies usually require a bigger financial investment at the beginning. Businesses that are already in operation have assets, like physical property, inventory, equipment and more.
Plus, the current owner is looking to be reimbursed for the future profits of the business that he is giving up in the sale.
Overall, you’ll need more money up front than you probably would to start a new company. However, on the flip side, getting a loan from your bank or cash from investors should be a lot easier, because there is less risk involved in the transaction.
Hire a Professional
When you’re putting together a deal like purchasing an existing business, you’ll probably need to pay several professionals for their services. In the course of performing your due diligence making sure that the business is what the owner says it is you’ll need help from attorneys, accountants, business valuation experts and others.
Don’t skip this step because in the case of buying a business, what you don’t know can hurt you.
You should be aware that some existing businesses will require an infusion of cash to make it profitable, even if it’s not in danger of failing. However, in most cases, a business that isn’t performing well will be priced lower.
Agreements or Contracts
When you’re investigating a business for possible purchase, you should be alert to the existence of any agreements or contracts that might be unprofitable for the business.
You may not have any choice about honoring these agreements, but you should be aware of the fact they are there and prepare for their impact on your bottom line.
Does the Business Have a Good Reputation?
What about the reputation of the business you’re considering? Are they well-thought-of in the market sector? Do they provide good products for a fair price? What about customer service?
Unless you’re a whiz at turning things around, you might want to pass on any company that needs a reputation makeover–unless, of course, you can buy it for a exceptionally good price.
Something you really, really need to know when you’re shopping for an existing company is the reason it’s being sold. Is the current owner ready to retire? Or does he know something about the future that you don’t?
The owner may consider his reasons for selling to be personal information, but you have a right to know why the business is on the market. If the seller is unwilling to discuss it, move on to the next prospect.
One of the best reasons to buy an established company is that you get a knowledgable, well-trained staff. However, if the current employees are demoralized and unwilling to accept a new owner, your success could be sabotaged.
Try to meet with key employees in a setting that allows them to comfortably share their thoughts about the sale with you.
An important rule to keep in mind when considering the purchase of an existing business is to avoid assumptions. If you have questions, ask them. Check and double-check their financial statements.
The main reason you want to buy an established small business or company is to avoid risk, so don’t take any chances.