Running a small business is not a job for the faint of heart. For would-be entrepreneurs looking for a head start, buying an existing company or franchise is an option for them. By understanding the true value of the business prior to buying, new owners can enter the transaction with more realistic expectations of income and expenses. Here are some of the pros and cons of buying a business that should be considered.
- Business Structure – For those who'd like to run their own company but aren't quite sure how to go about it, buying an existing business is worth considering. An existing business should have systems in place to track financial information, inventory, and sales. Starting a business from scratch means spending time and money to develop these processes. In cases where outside assistance would be required to set up the new business, some gains in cost-efficiency may be recognized by purchasing an existing company.
- Customer Base – One of the appeals of purchasing an established business is acquiring the customer base. A loyal customer base can save initial marketing costs and bring in sales from the day of the business transaction. Many customers will be interested in learning how the business may change, and what new products and ideas the change in ownership will bring. By invigorating the business and adding new energy, new owners can hope to increase sales and profit.
- Cash Flow – Bringing in sales from day one also helps generates cash flow, which is vitally important to new owners wishing to develop their business.
- Transition Assistance – Sometimes the previous owner or other employees will agree to stay and help with a transition period. Files and documentation should also be passed along to assist new owners in learning the details about the company. Even if the previous owner is only reachable by phone or email, just having someone available who knows the business can help bring the new owners up to speed in a shorter amount of time.
- Cost – Purchasing an existing businesses can require a sizable investment. According to SCORE, the price of small businesses has been rising, and even the least expensive industries, including restaurants, have an average cost of over $150,000. Buying an established business will often cost more than starting from the ground up.
- Dated Technology – The existing structure of the business can also be a con if it's operating inefficiently. Ask the current owners about inspecting company systems prior to purchasing. If technology appears outdated and needs to be replaced or redeveloped, work this into the overall value of the business.
- Company Reputation – If the existing business has a negative reputation in the community or many poor customer reviews online, this may pose a difficulty for new owners to overcome.
Don't Cut Corners on Pre-Investment Research
Before investing in a small business, analyze the financial data provided by the current owners. Devise an independent list of pros and cons and generate a list of questions. Ask why the business is for sale. Are the owners ready for retirement or are they tired of working many hours for very little profit? Are sales increasing or decreasing, and why? It's essential for a new buyer to understand the current financial situation of any small business before making an offer.
Lastly, before committing to a transaction, ask for outside help. Engage financial and legal experts to independently evaluate the pros and cons of buying a business. Small business advisory organizations like SCORE can also offer a mentor to help those looking to head into new business ownership.