FEB 12, 2019
So you want to be a business owner, but the prospect of starting your own business is intimidating. One potential solution: Buying an existing business. An existing business typically has customers, vendors and branding already in place. A good company will also have an adequate amount of inventory. That means you can take the key and continue the business without having to build supplier relationships from scratch.
This isn’t an easy route to entrepreneurship, though. Buying a business can be a complicated and arduous process, so you need to know what you’re getting yourself into. Here’s what you need to know.
Buying a Startup
If you’re an existing business owner who wants to expand your services or products, consider buying a startup. You can purchase a startup for its client list, brand, technology or intellectual property.
There are a lot of good reasons why buying a startup might be a good idea for a current business owner:
- Buying a startup can help you attract and retain a different demographic without starting from scratch.
- The startup might have a distribution method that is a good fit for your own business.
- While the profit margin of a startup tends to be lower than an established business, it might also have less debt.
- A small startup might be more nimble and able to adapt to change.
If you decide to go this route, take a close look at current staff. Look for businesses who have founders or staff with the type of talent that you are seeking. While you can always poach talent, buying a business could allow you to acquire a team that already works well together and is invested in the mission of their business.
Keep in mind that if you need to finance, startups present their own set of challenges. Obtaining a loan for a startup business can be harder, since it would not have as long a track record as a business that has been operating for a decade. The startup might not even be profitable yet, and you might need to demonstrate a path to profitability or show how it will contribute to your own company’s bottom line.
Purchasing an Existing Business
If an existing company better fits your needs, look for one that has a good reputation, a steady list of customers and low operating expenses. Understand, though, that buying an existing business means doing a lot of due diligence. Here are some things to look out for:
- The founder or owner will likely downplay any issues with a landlord or customers. Ask plenty of questions and ask for documentation.
- Examine several years of its financial information and focus on how much profit it generated. Also look at its cash flow, debt levels and other expenses such as rent, marketing and advertising.
- Determine if the owner plans to stay on or has any children who expect to take over a portion of the business. Hammer out all the details beforehand.
- Acquiring an existing business might be more costly, especially if prior investors are involved. Consider whether you are willing to seek additional investors and take on a bank loan.
Above all, make sure you go into things with an understanding of what’s made the business successful. Buying an existing retail shop or restaurant might be easier than starting one from scratch, but remember that if you change the direction or tone of the business, the existing customers may not accept the changes readily. Further, radical changes to the business and its operations could alienate existing employees. Put your own imprint on the business and find ways to improve, but tread carefully.
Buying a Franchise
A franchise is in many ways the ultimate ready-made business. The brand is already established, and your involvement in marketing may be minimal. Certain aspects of its operations may be set in stone. If you take over a restaurant franchise, for instance, everything from the supply chain to the menu will likely be fixed.
Conducting due diligence on these businesses can often be easier, too. They have a longer history, more financials and other investors. If it’s a public company, it will be even easier to find key information on the business and its financials.
There are some decisions to make, however. You must decide if you want to buy a franchise in a new or existing location. Finding the right location will take time, and requires some research to ensure adequate foot traffic. And don’t assume that the branding and marketing will take care of themselves. While large franchises have a recognized brand, some of them are only well-known in certain states or regions of the country. Consider carefully whether this is a business and a brand with staying potential in your area.
One major issue with a franchise is the loss of control. You must adhere to its rules, procedures and other standardize practices. That might be a relief to some would-be owners, but others might chafe at it. Determine if you’re an entrepreneur at heart or merely want to purchase a business which generates a healthy profit.
Even if a startup or existing business is highly profitable or popular, there are some disadvantages. In most cases, you will have to retain its current employees at least for the short-term. Turning over an entire staff is not a good choice fiscally or operationally. Don’t underestimate the value of institutional knowledge, to say nothing of the impact on morale of mass layoffs.
On the other hand, existing staff might be resistant to any changes you want to make. The employees may also not like new ones that you hire. And any changes that you make toward the pay structure, benefits and other human resources issues could face resistance. Assure your employees that you are going to stay in business and will not make drastic changes. The same is true for its board of directors and its investors.
Problems could also arise with your customers, clients and vendors. They likely have certain expectations of the business: The products it sells, its methods for doing business, and the length of billing cycles.
Decide before you purchase the business whether you want the CEO or founders to stay on to provide a smooth transition or if you want them to resign soon after the deal closes. There is no right or wrong answer to this issue. It depends on your goals for buying the business, as well as your personal preferences.
Before you sign a contract, consult and hire a business broker who can help guide you in the process. This process can take several months or longer and you will likely need the assistance of an auditor and lawyer. You will likely also need to employ the services of an accounting firm specializing in mergers and acquisitions.
More Tips for Business Owners
People who own businesses also need to conduct their personal finances differently. Your taxes become more complicated, for one. Your budget and overall financial plan will also become more complicated than if you had an ordinary full-time job. That’s why many business owners choose to work with a financial advisor who specializes in these issues. We recommend using this financial advisor matching tool. Just answer some questions about your finances and goals, and the tool will match you with up to three advisors in your area.
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