Buy a Business or Start One?
Buy a business or start one? It’s a question I hear a lot. Is it really safer to get into an existing business or start one? Most believe buying is the answer.
It’s true in that a business start up tends to have a high failure rate. However, most new businesses are poorly planned and prepared for. Make sure your business and ideas are well thought out and you will increase your chances for success.
Proper planning makes all the difference as does surrounding yourself with top notch advisors. You don’t go to the least expensive doctor when you have a serious problem, you want the best you can afford given your situation. This is true whether you buy or start from the ground up.
It’s false to the extent you decide to start small, perhaps even part-time and work your way up. You may want to start a business that lends itself to this model. If you do, it can work well as you avoid paying the potentially large upfront purchase price.
Not many can pay cash for a business and are forced to take on debt to get started. Debt is always a bad idea. Let me say that again – debt is always a bad idea.
Going into debt puts you in a difficult hole. After providing for all your operational costs you still need to make payments on the loan. Only then can you think about paying yourself. The banker will never be the last to get paid. This increases substantially your risk. It means that a bad market will put you out of business.
Debt cuts your options down significantly and will make you a slave to your lender. You wanted to leave the world of the wage slave … great idea … but don’t enter into the world of the debt slave. It’s not any better, it’s worse.
In the right situation, buying an existing owner’s business can make a lot of sense. A well established small business in a good market, purchased at a fair price, can be a good way to go. Don’t buy potential alone. The business must have proven results. To determine whether a business is a fair deal for you will require a review of its financial records.
Take a look at the last five years tax returns and talk with of the management of the business. You will likely be best served to have a business valuation done by a professional, a Certified Valuation Analyst (CVA).
Before incurring that cost you or you and your CPA could review the financial information to see if there is even a likelihood that it may work before engaging a valuation professional. Small businesses that have been around five or more years have a lower failure rate. Economic conditions can throw a wrench into that though. Be sure to take into account how the business will do in any given economic situation or crisis.
Some closing thoughts on purchasing a business. When you start a business you are on the offensive, building and growing. When you buy a business puts you are on the defensive. I’m not a fan of being on the defensive, are you? When buying, you take on the owners customers, employees, and culture. Let’s see why that is difficult.
You will have to rid yourself of the bad, nonprofitable, or late paying customers. You will have to rid yourself of bad, low character, and under performing employees. And you will need to change the culture of the business from the prior owner’s to one with your unique imprint. My experience is that this can take three or more years and it’s not a lot of fun.
I’ve taken this journey many times and it often seems to be easier to start a business from scratch than buy. So take the time before you buy, look at how many undesirable customers and employees there are. What is that culture really like? Don’t just look at the numbers. You’re about to be the boss and will need to run this business. It’s a big investment of time and money to change the culture, employees, and customer group. Be wise and make a good decision.
No related posts.
Related posts brought to you by Yet Another Related Posts Plugin.
Tags: 
