12th January, 2017
Building a business from scratch can be exhilarating, but it’s not without risk and hassle – so is the better route to buy an existing business?
Many people elect to buy a small business rather than plough their cash into an untried and untested startup or small business, and for some people it’s a better option.
Are you the type of person who would benefit from buying an existing small business instead of creating a new one?
Here are five reasons why you might consider it.
Startups are exciting, but not for the fainthearted.
In fact, your personality type just may not be right for the thrilling and risky path of a startup.
If you’re an introvert, how will you go about pitching, negotiating and ultimately searching out those first customers to take a risk on you?
If you’re starting a new business, you are starting with no customers and no brand recognition.
If you buy an existing business, you are buying into pre-existing success.
With the help of the existing owner and a well-planned handover period, a smooth transition of ownership can be almost unnoticed by customers.
Assuming you pay the right price to achieve your required return on investment, acquiring a pre-existing successful business will certainly enhance your opportunity for success.
Buying an existing small business will usually be the quickest and often most efficient way for a new owner to enter the market.
If you’re able to work in the business before and after a handover period, all the better.
Some business buyers may even structure their purchase as a partnership initially, with the longer-term goal of buying out the pre-existing partner.
You can get in and get your hands dirty in a fully operational business much sooner than if you are starting from scratch.
This isn’t to say you should rush in.
It may take a long time for you to research the location, maximum price and undertake other due diligence on a potential business purchase.
While you may have the capital to partially buy the business, you may need additional cash to get the purchase over the line.
Generally, you’ll find the whole process of borrowing much simpler if you have an existing business rather than attempting to start your own business from scratch.
Bankers don’t like uncertainty, after all.
Five years of good cash flow history, a solid business plan and a well thought out transition of ownership make obtaining finance a lot easier.
Even with security (for example, the mortgage over your home), financiers will be much more hesitant lending to a potential buyer with nothing but a business plan and some handsome cash flow projections.
It is even more impossible for startups.
They will most likely need to self-fund, pray for an angel investor or get in the ring and pitch against other entrepreneurs for a chance at getting some funding.
Businesses are complex beasts. Millions of individual decisions, actions and reactions may be needed for a business to operate profitably.
They need efficient systems and processes for everything from ordering supplies and staff management to quality control and invoicing customers.
One of the best reasons to consider buying a small business is you can go in and observe how the systems and processes are working.
Many of the tough decisions will have already been made: there should be fit-for-purpose equipment on premises, and you can watch the staff who will operate it.
In purchasing a small business, staff are critical for business continuity so making sure your potential staff are operating well is crucial.
Apart from using cash flow as a solid method to value the business, it also provides instant revenue.
As a startup, it could be years before you see positive cash flow and a return on investment, if at all.
Many business owners are risk-adverse, while others are rewarded for being bold risk takers.
Like any investment, there is a trade-off between risk and reward.
You may ultimately make more money by creating value through starting your own small business, but there is higher risk involved.
You need to manage investment of time and money to a level you are comfortable with.
Many of the risks associated with starting your own business can be eliminated by buying an existing business.
If you have done your homework well, buying an existing small business will shortcut a lot of risk, time and stress points.
It will be still exciting, exhilarating and exhausting, but you will own a business, be earning income, and have people, systems and processes in place for you to grow and nurture.