Every business is required to establish a legal structure, whether there's one employee or 10,000. A legal structure is a recognized category of organization from a legal perspective that influences how your business will operate regarding taxation, recordkeeping. Designating a legal structure for your company can also reduce the risk exposure of your personal assets.
Choosing the best legal structure for your business
Choosing a legal structure is one of the first decisions you'll make as a business owner. Although you may be chomping at the bit to get started with the fun stuff like marketing and sales, you should not rush this important first step. Take the time to weigh your options and consider the proper way to set up your business's most fundamental component.
Factors to consider when choosing a legal structure
Situations and business needs vary among entrepreneurs. Choosing the best legal structure for your new business early on can save time, money, and headaches down the road. There are four key considerations to factor into your decision:
The industry your business is in
When it comes to choosing one of the small business legal structures for your startup, the nature of your business is an important factor. Some industries are associated with a higher amount of risk and, consequently, are more vulnerable to lawsuits. A graphic designer working as a freelancer will have a different level of risk than a group of attorneys opening a firm together, and both parties will have different legal needs than an equipment manufacturer arranging complicated contracts with large suppliers and vendors. The inherent risk within your industry will influence which legal structure is the best fit for you.
The amount of protection you want for your personal assets
On the same thread as risk, you need to figure out how vulnerable your personal assets might be should you get sued. Lawsuits can come from customers, vendors, employees, and even landlords. Each legal business structure comes with varying levels of personal asset protection.
The tax implications of each legal structure
Each business structure carries its own taxation responsibilities. Variables include whether the business is considered a separate entity from the ownership, the schedule for paying taxes, and how the tax liability is calculated. There are also different forms required by the IRS when taxes are filed.
Your firm's growth plans
You can change your business's legal structure down the road, but you should put some thought into both the scale and pace of your future growth. You might be the sole employee of a freelance business now, but do you envision expanding into a larger organization with employees and more services? Or maybe you're a single shop with plans for rapid growth and franchising. What happens when you're ready to leave the business? Would you like to have a business legacy to pass along, or are you okay if the doors are shuttered when you're no longer involved? Your answers to questions like these can help determine which business legal structure is ideal for you.
The different types of business legal structures
There are different types of business legal structures, and selecting the right one can give you the proper balance of cost, legal protections, and benefits. Each comes with its own set of advantages and disadvantages.
What are sole proprietorships?
More than 27 million sole proprietorships filed with the IRS in the 2018 tax year (the most recent data available). There's also a growing independent workforce emerging. Also referred to as individual entrepreneurship or simply proprietorship, sole proprietorship is the simplest form of a business legal structure and a natural choice for independent workers. If you become a sole proprietor, prepare to include your business and income expenses on your personal tax return.
Advantages of a sole proprietorship
- This legal structure is simple to set up, with minimal costs.
- Sole proprietorships have low organizational and operating costs (you retain complete control over decision-making power for your business).
- You can use business losses and expenditures to offset income.
- Filing taxes is simpler: You don't have to file a separate tax return for the business, as profits and losses are passed through to the sole owner.
- There are few formal legal requirements.
- You may be able to deduct 20% of your business income with the 20% pass-through deduction under the Tax Cuts and Jobs Act.
Disadvantages of a sole proprietorship
- Personal assets have unlimited exposure (you may consider an umbrella policy to help protect yourself).
- You are personally responsible for the debt and financial obligations of the business.
- Getting a business loan or attracting support from investors may be difficult.
What are Partnerships?
If you're working with others on your startup, you may want to consider either a general or limited partnership. Each member of a general partnership shares liability. Limited partnerships are characterized by including a general partner with unlimited liability, and partners with maximum liabilities that match their investment in the business.
Advantages of a partnership
- Partnerships are relatively easy to set up.
- A larger breadth of leadership expertise can be found than with just one person.
- Financial burdens are shared, and having more people equates to a greater ability to raise funds and access cash.
- The business isn't taxed as a separate entity. Rather, each partner files profits and losses on a personal tax return.
- Partners may be able to deduct 20% of their business income with the 20% pass-through deduction under the Tax Cuts and Jobs Act.
Disadvantages of a partnership
- In addition to your own exposure, creditors can go after one or all partners, meaning you may also be liable for the activities of one of the partners.
- You must share decision-making control with others.
- You'll have to create a formal exit strategy to avoid potential complications should you sell the business in the future.
What are Limited Liability Companies (LLCs)?
Another popular structure among startups is the limited liability company (LLC) because it works like a hybrid of a sole proprietorship and a corporation. Like corporations, an LLC limits the personal liability of the owners. That said, it's important to note that some of the liability benefits of LLCs have been overridden by the courts in cases of fraud or misrepresentation.
Advantages of an LLC
- An LLC is a separate entity from the owners. You can lose the money invested in the company, but your personal assets are mostly protected from debts and lawsuits.
- You are the sole representative of an LLC, meaning you get to make your own decisions and are not beholden to any external shareholders or Board of Directors.
- You may be able to deduct 20% of your business income with the 20% pass-through deduction under the Tax Cuts and Jobs Act.
- There are relatively affordable startup fees ranging from $40 to $500, depending on your state.
- Profit sharing is at the discretion of the owner(s).
Disadvantages of an LLC
- Profits may be subjected to self-employment tax.
- Unlike a sole proprietorship or partnership, you have to pay annual fees to keep the LLC in good standing.
- Because the LLC is a separate business entity from the owner, careful attention must be paid to keep personal and business funds separate and well documented.
- Owners may have to pay individual unemployment compensation.
What is incorporation and what is an incorporated Business?
There are two different types of corporations: C corporations and S corporations. Owners are called stockholders or shareholders. The corporation's activities — marketing, sales, revenues, expenses, assets, and liabilities — are legally separated from the owners (shareholders). Regardless of which is best for you, incorporating a business shares some common advantages and disadvantages.
How to incorporate a small business
Incorporating a business is the process of separating the company from your personal assets and forming a new legal entity, known as a corporation. For-profit business ventures or nonprofit organizations can be incorporated, but sole proprietorships cannot. The newly formed corporation will exist independently for legal, tax, and insurance purposes. If you'd like to learn how to incorporate a business, here are the basic steps to follow:
Research state laws on incorporation
If you want to know where to go to incorporate your business, an online search of registration forms for your state will provide a starting point. State of incorporation may be based on a number of factors, including primary business location, tax laws, or local business regulations. To find out how much it costs to incorporate, check with your state for filing fees. Additionally, due to the more complex structure of corporations compared to other business structures, you may want to pay a professional to assist you with the process.
Name the corporation
Check the state register to determine if your company's name is available. If another corporation has already registered that name, you'll need to come up with something new.
Choose the structure
Corporations can be structured as a C-Corp or an S-Corp. Large corporations generally opt for C-Corp status, but you should understand the relative advantages of both, as outlined below. Important differences include how these types of corporations are taxed and the number of permissible shareholders.
Draft Articles of Incorporation and Bylaws
Each corporation must have written articles of incorporation and corporate bylaws. The articles of incorporation must be filed with the state and they provide the information required to register the corporation, such as the name of the business, the type of business, and the legal address. The more detailed corporate bylaws list out legal procedures companies and their directors must follow, including the requirement for an annual shareholders' meeting.
Select Board of Directors and Officers
Corporations must form an independent board of directors and name their corporate officers. The board of directors is responsible for overseeing the business's activity from a high level. The board may also provide guidance to small businesses when needed. The corporate officers are the executive management of the company, responsible for running the business.
Prepare accounting / funding
Set up an accounting system to record the initial funding of your new corporation. You should also open a bank account in the name of the corporation to separate assets. Going forward, corporate cash flows should go through this account.
Apply for Tax ID and file necessary state paperwork
Once your corporation is set up, you'll be able to file for a Federal Employer Identification Number (EIN), which is used as a tax ID. You will also need to register your corporation with the state where you chose to incorporate and pay the required filing fees.
Advantages of a corporation
- Being an independent legal entity, corporations are separate from you, the owner, eliminating the risk to your own personal assets that legal proceedings or credit issues could bring.
- You can issue shares to raise funds.
- Transfer of ownership is simplified.
- If something happens to the founder, the corporation continues to operate as before, providing longevity to the business.
- Incorporating adds legitimacy to your company.
Disadvantages of a corporation
- Expect to pay legal fees to set up a corporation and for annual statements and resolutions.
- Corporations are typically more expensive to start than other business legal structures. There are startup fees and annual fees.
- You must adhere to a corporate structure, with a board of directors and corporate officers.
- A corporation is more complex to manage. It must provide annual reports, and careful accounting records must be maintained.
What is a C-corp?
Corporations set up as C-corps have their own tax brackets. This means they are taxed separately from the owners. When you think of large U.S. companies, most are generally C-corps.
Advantages of a C-corp
- There are no shareholder limits, and shareholders can come from anywhere in the world.
- Current tax brackets for C Corporations are generally lower than individual income tax brackets.
Disadvantages of a C-corp
- Double taxation is often cited as one of the biggest disadvantages of a C-corp. Shareholders must declare dividends received from the corporation as income on their personal tax returns even though the C-corp has already paid taxes on that profit before the distribution.
- Reporting can be cumbersome, as annual reports along with minutes of board member and shareholder meetings must be recorded and provided.
What is an S-corp?
S-corps are named for Subchapter S of the IRS Code, under which they're taxed. This involves setting up a C-corp and then having all shareholders file a Form 2553 to the IRS within two months and 15 days of the setup.
Advantages of an S-corp
- Income is allowed to "pass through" to shareholders, and shareholders only pay taxes on their allocated income on their personal tax returns.
- Tax credits, losses, and deductions also pass through to the shareholders.
- S-corps avoid the double taxation penalty
- Shareholders of S Corporations may be able to deduct 20% of their business income with the 20% pass-through deduction under the Tax Cuts and Jobs Act
Disadvantages of an S-corp
- S-corps are limited to 100 shareholders.
- Owners (shareholders) must be individuals and residents of the United States.
- The company must be a U.S.-based organization.
As you explore the array of business legal structure and their relative benefits, you may want to seek the expertise of business incorporation services. Incorporation services providers can help you file the correct paperwork, obtain your federal and state ID numbers, and adhere to the necessary legal requirements — all to get you started on your exciting and rewarding entrepreneurial path.
Often closing sales is the goal of virtually every transaction involving a business and its customers.
The best closing sales tips encompass not only how to close a deal, but also how to look at the broad spectrum of sales, lead generation, marketing, the customer life cycle, and long-term customer retention. All of these activities contribute significantly to achievement of that all-important objective: how to close a deal.
Marketing efforts are only as effective as the results they produce. In addition to creating well-planned marketing campaigns, salespeople must also qualify the leads they generate. Generating a lot of leads is noteworthy, but it's the qualified leads that often convert into customers.
Closing out sales: Tips to generate more revenue for your business
As businesses emerge and re-open throughout the COVID-19 outbreak, business owners are understandably concerned about attracting new customers and retaining the customers they previously had.
According to a recent Paychex survey, one in three business owners expressed concern they will have insufficient customer demand when they reopen. At the same time, they are cautiously optimistic that recovery time will take three or fewer months.
A lot depends, of course, on knowing how to close the deal when the time comes.
Yielding better leads
Qualified leads are those with a strong interest in your business and its products or services. To generate strong leads from your marketing tactics, try thinking outside the "paid advertising box."
With social distancing and other restrictions in place, it's safe to assume that increased numbers of prospective customers will do their shopping online. In many cases, this will occur within the context of mobile devices. The ability to leverage emerging digital (and mobile device) technologies will be a key element in your customer acquisition and lead generation strategies.
The good news is, employing these technologies can give you a competitive advantage over other businesses that fail to adopt these methods or do so at a slower pace. Here are digital lead-yielding strategies to modify and implement within your own business:
Create a business website. Even before the pandemic, having a website in place--that's both highly informative and easy to navigate--was a business necessity. Now, it's just about impossible to envision much revenue-generating activity without such a website. Remember, many prospective customers will want to visit your site before engaging with you in order to determine what precautions you are taking to ensure adequate protection for customers and employees.
Publish a company newsletter. Include helpful, high-value content that keeps existing and potential customers interested and excited about what you have to say. Consider offering special deals, industry tips, or other relevant content.
Run an email marketing campaign. Keeping in regular contact with your target audience is more important than ever. A focused, ongoing email marketing campaign enables customers to remember you the next time they need something you have to offer. You can also increase the value of the emails you distribute by occasionally including coupons or deals available only to your email recipients.
Place a "subscribe" form on your website. Automate the subscription process so your mailing list can grow. Ask for only the most basic information from would-be subscribers, so they're more likely to request ongoing notifications.
Network. The traditional approach to business networking involves getting out in your community by taking public speaking gigs, sponsoring a community event, and/or joining a small networking group of like-minded professionals.
Digital networking is equally viable, in terms of potentially yielding more leads. Focus your efforts on sites like LinkedIn, where you can share news about your company, valuable "inside tips," and other helpful information new customers can grow to depend on. This builds credibility in your brand, which can be essential in attracting new customers.
Get involved in social media marketing. Social media is arguably the best way to engage in an ongoing conversation with your customers, where you can learn from them and they can learn from you. But remember, social media is a two-way communication channel; if someone asks you a question or airs a complaint, don't ignore it. By responding quickly (and professionally), you'll show that you care about your customers' happiness.
In the Paychex business owner survey mentioned above, a quarter of those surveyed reported they have significantly updated their technology since the pandemic began. They are also focused, as you should be, on increasing their use of social media and boosting their presence there.
Solicit customer reviews. Input from customers can often generate interest among others who read reviews of your business on Yelp or other similar sites. Encourage your satisfied customers to write brief, laudatory reviews and then promote the favorable response elsewhere on your social media platforms.
Offer a referral bonus and reward your best customers. Sometimes your best customers can also be your best marketing tool. Keep them happy and they will gladly recommend you to their friends and family.
Other ways to enhance your customer referral process include:
- Make the process convenient. Customers are much more inclined to refer your business if it doesn't require considerable time or effort on their part. Set up an easy-to-navigate referral form on your website, which customers can easily complete and submit. Be sure this automated system quickly acknowledges receipt of such referrals, along with related thank-you email messages and reminder notices.
- Pay attention to the timing of referrals. Consider requesting a customer referral immediately upon completing a transaction with a satisfied customer. Don't just ask once and forget about it. Politely remind the customer again once every two or three months.
Generally speaking, satisfied customers will be happy to refer others to your business. But they like to be asked first!
Lead Generation Tips
The campaign to generate promising sales leads involves several other key tactics worth pursuing. Keep these tips in mind:
Craft a strong call-to-action. Prospective customers are often moved along the purchasing journey with a compelling call-to-action. To help ensure the effectiveness of your call-to-action:
- Keep the wording concise, to the point, and action-oriented.
- Separate the call-to-action message from other content in your business emails, website, social media posts, etc. Don't let it get lost in other content. The message should be easy to spot (for example, "above the fold" on your home page) with a clear direction as to what to do next, such as "Click here."
Use a landing page to guide your prospects. When a visitor clicks on a call-to-action, it should take them to a dedicated landing page where they will gain access to whatever you are offering them, such as an eBook, white paper, newsletter registration, etc. Directing them to your homepage or a product page will only distract and frustrate them.
Make sure the landing page is very user-friendly. Avoid cluttering the page with advertising copy, visually distracting graphics, and so on. The key is producing landing page content that's short, to the point, and features lists and bullet points.
Focus on benefits, not product features. Your product undoubtedly offers a range of features you'd like to promote as part of the sales process. A better option is focusing on benefits the prospective customer will enjoy from purchasing this product. Answering a customer's fundamental question, "What's in it for me?", draws them to the next steps in the sales journey.
Keep your lead forms simple. Don't make the mistake of asking for too much information at the beginning of the sales process. Simply ask for the basics (name, contact info), so that would-be customers are more inclined to comply and keep the process moving forward.
The art of closing a sale
People want to buy from sales representatives who convey enthusiasm about their product or service. Key sales tips include:
Learn when to stop talking. Generally, the best approach with prospects is to listen rather than talk, and to ask questions, rather than drone on about your product's many benefits. The right questions lead to fruitful conversations, which in turn can lead to a better understanding of the customer's needs and challenges.
Build empathy. Prospects want to feel like the person selling to them genuinely has their best interests at heart. Empathy is the basis for a meaningful customer relationship, coming naturally out of being able to listen to what the customer says (and what goes unsaid) and offering the most efficient and cost-effective solutions available.
Serve as a valued resource. Whenever possible, share the expertise you have (even if this doesn't directly lead to closing a sale), because over time you can establish a bond that makes selling and closing easier.
Be closing from the outset. An honest, forthright approach is generally preferable to a hard-sell effort. Prospects should understand that you want to sell a product or service that can genuinely benefit their own business. They want to conduct transactions in an atmosphere of mutual respect and honesty. Make clear you're not engaged in any sort of sales "gotcha" game, but rather wish to work towards a close that feels like the organic conclusion to the process.
Recognize the buying signs. An assertive salesperson can sometimes miss clear buying signals from the prospect that indicate the deal is nearly done. Questions such as, "Can you tell me how long delivery will take?" or "Are additional upgrades available?" suggest the prospect has made up their mind and is ready to move forward. Answer questions like these and then close the deal.
Competing with other companies
Small businesses must contend with the challenge posed by other businesses in the same industry. Some of these competitors will be much larger, with far greater resources. How can you compete?
Emphasize your unique value proposition. The benefits your business offers to customers should form the foundation of your unique value proposition. Your sales team should emphasize whatever sets you apart (less cost, better service, or higher-quality value) into their all-purpose sales pitch.
Speed up your response time. Larger competitors often take longer to respond to customer inquiries or are slower to talk about a sale. While cultivating sales leads, be sure to respond quickly when a prospect shows interest. Don't rely upon an automated response. Let prospect know immediately of your interest in exploring solutions for their companies.
Promote your business strengths. Cost isn't always, or even the predominant, factor in a prospect's decision to make a deal. If your small business does a better job delivering a product or service on or ahead of schedule — or provides extended service beyond the date of delivery — make this part of your sales pitch.
Take steps to boost customer retention
The sales process never ends just because a sale is closed. Every business wants (and often depends upon) retaining the customers it acquires. Here are ways to convert one-time customers into repeat business:
Make customer service a priority. Establish internal systems that support front-line employees to deal with virtually any type of customer-interaction situation, often empowering employees to make on-the-spot decisions, rather than passing along customer inquiries and complaints elsewhere. Measure the results of employees' customer service efforts and reward employees who excel in this area.
Survey your repeat customers. Consider distributing a quick, easy-to-complete survey to your most valued customers, seeking details on why they keep coming back, what they like about your business, what areas might be worth improving, and any other thoughts they might have. Be sure the format you choose for the survey (email, website, social media) makes it convenient for them to respond. Offering a discount on their next purchase is a good incentive for them to do so.
Highlight customers in your communications. Customers often need to be politely reminded that your business exists. Distribute an email newsletter that focuses on customer-centric news and features. Interview loyal customers and feature them on your website, in your newsletter, and in other promotional materials with their permission.
Say "thank you" and stay in touch. After a sale (or any customer interaction), a brief, personalized "thank you" speaks volumes about the value you place on staying in touch with both customers and the people in your professional network. Have an automated "thank you" message appear with every product fulfillment or in a separate, follow-up email. Just be careful to word this message in a way that avoids coming off as generic or insincere.
Share tips, insights, and information you find online. Customers who receive informative updates and insights from a business may return when the time is right. In your social media activity, generously share helpful "how-to" articles and videos you come across. When you share content that solves a customer's pressing problems — without a pushy sales message — you can build tremendous goodwill for future interactions.
Closing sales and boosting customer retention are among every small business's highest priorities. By following the tips and suggestions offered here, you stand a far greater chance of making the sales that help keep your business thriving. Find out more about effective online marketing techniques to help maintain the success of your business as the economy seeks to move past the coronavirus pandemic.
Running a small business is not a job for the faint of heart. Entrepreneurs work long hours and take on many different challenges requiring a broad range of business skills. Potential business owners looking for a new venture may choose to build a company from the ground up, or buy an existing company or franchise. Companies with a loyal customer base and steady revenue stream can be enticing, though the initial investment might be higher than starting small and building slowly. Let's look at some of the pros and cons of buying an existing business.
Why you may want to buy an existing business instead of starting one from scratch
There are several advantages of buying a successful existing business, from convenience to a quicker (and safer) return on investment. Knowing the benefits of this business strategy may well tempt the aspiring entrepreneur.
1. Better financing options
Existing businesses already generate a revenue stream to help cover costs, whereas startups often seek financing to pay expenses before they even open their doors to customers. Often, established businesses have a reputation in the community and a customer base. This gives lenders assurance and can persuade them to offer financing options with more favorable terms. Established businesses may also use assets and inventory as collateral, which can secure favorable financing in comparison to startups.
2. Already established brand
An established business often enjoys brand loyalty with customers and is known in the market. As a new owner, you may have ideas about tweaking the existing brand, but you won't need to make a large investment in marketing to develop something completely new. Adjusting a brand when you already have a loyal customer base is much easier than building a market presence from nothing.
3. Existing customers
Being able to count on a reliable number of customers from the outset is one of the advantages of buying an existing business. The benefit is twofold: a solid customer base and a steady cash flow.
A built-in customer base is a huge advantage to an entrepreneur. Customer loyalty can translate into lower marketing expenses and the ability to bring in sales from the get go. Although current customers may expect certain products and features associated with the company's current product line, they will also be interested in learning how the business may change and what new products will be offered. By invigorating the business and adding a fresh perspective, new owners can hope to increase sales and profit.
Bringing in sales from day one also helps generate cash flow, which is vital to new owners trying to develop their businesses. Owners of startups must devote a significant amount of time to finding investors or attracting financing, while buyers of established businesses can focus on running their new company earlier in the process. A steady revenue stream also allows owners to make improvements and upgrades, while startups may need to run on a much leaner budget until they're able to generate more cash from operations.
4. Well-established supply chain
Existing relationships with vendors and other business partners are essential to a smooth business transition. Your supply chain not only provides an important network of business contacts but also can offer help and advice on how to sustain or improve the business. They've been working with the established company for years, and they may know what systems or operations are working well and what needs improvement. Comparatively, owners of startups must spend more time and energy seeking out and creating valuable business relationships and growing them incrementally.
5. Access to trained staff and proven internal processes
Among the many pros of buying an existing business, perhaps none is more critical than starting out with the workforce and established operational systems that presumably made the company attractive enough for you to buy it in the first place.
An existing business should have systems in place to track financial information, inventory, and sales, as well as to perform other essential tasks. Starting from scratch means spending time and money to develop these processes. In cases where outside assistance would be required to set up a new venture, some gains in cost-efficiency may be recognized by buying an established business instead.
Staff and transition assistance
In some situations, the previous owner or other employees will agree to stay and help manage the company through 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, having someone available who knows the business can bring the new owners up to speed in a shorter amount of time. Additionally, longtime employees who remain after the sale can provide valuable information and an outlook on what's kept the business alive through market cycles. This institutional memory, combined with some staff continuity, can be important. Customers will feel more comfortable sticking with a new business if they see a familiar face behind the front desk during a transition period.
6. More financial reward in growth
Growing an already established revenue stream can provide a larger payoff compared with initial business generated by a startup. Practically speaking, the energy and effort required to grow either a new or established business by 25 percent may be about the same. The key difference is there can be more financial reward with an existing business purchase because the added revenue stream comes from a larger base of customers. The original owner has lent expertise and knowledge developed over the years to build more efficient processes, which in turn can bring in more profit. Initial investments in marketing, which generally take years to pay off, may also benefit second owners.
7. Greater likelihood of success
Based on 12 years of tracking by the Small Business Administration, 80 percent of small businesses survive their first year — meaning around 20 percent do not succeed. This can be compared with the report that one in 12 of all small businesses close each year, which is around 8 percent. If a business has weathered the first five years or more, chances are that the original owners did something right or hit upon a product or service with a verified market in the community. When you buy a business that's already successful, you're likely increasing your chances of success compared to an untested startup.
Potential cons of buying an existing business
As with any investment, there are both pros and cons. Research the company as much as possible prior to making an offer. Don't limit your information to what is presented by the current owner; get out into the community and talk to vendors, customers, and anyone else who has dealt with the business for sale. Engage a financial adviser to study the information provided by the current owner and offer advice on pricing. You can also work through the buying-an-existing-business checklist provided by SCORE. There are several factors to consider, but generally aspiring entrepreneurs must be mindful of the initial outlay of money and wary of the situation they're walking into.
High cost for the initial investment
Purchasing an existing business can require a sizable investment. Even “inexpensive” industries and online-only businesses have costs.
Buying an established business will often cost more than starting from the ground up. Further, established businesses that are highly profitable will likely cost more than those involving more risk or a "fixer-upper" in need of an investment in technology or modernized equipment (see below). In comparison, when starting your own business, you have the option to start with a smaller investment and grow slowly over time.
Dated processes and technology
The existing structure can also be one of the cons of buying an existing business. Overstaffing and inefficient processes are examples of hurdles that must be overcome before the company can achieve its full potential. Ask the current owners about inspecting company systems before the purchase, to get an idea of what needs to be upgraded. If technology appears outdated and needs to be replaced or redeveloped, work this into the overall cost of the business. Sometimes, outdated systems are so entrenched throughout the company that it might be easier to create a new business from scratch.
Existing company reputation and culture
If the existing business has a poor reputation in the community or many negative customer reviews online, this may pose a challenge for new owners. Inheriting a poor reputation for customer service means new management will need to go the extra mile to make sure they're exceeding expectations. As such, you may not be able to raise prices to keep up with competition. Prior to buying an established business, consider how much effort will be required to reshape negative aspects of a company's reputation or culture, and factor this into your decision.
What to consider before buying an established business
When considering a business purchase, it's important not to cut corners in your evaluation. What you see on the outside may not be a true picture of how the company is run behind the scenes. Keeping the pros and cons in mind can help you spot potential issues, and provide a basis of comparison when evaluating more than one business opportunity. If you're serious about buying an existing business, use a checklist of best practices to give you the best chance at success.
Determine the type of business you want to own and run every day
Would you prefer a solo work-from-home endeavor as opposed to managing a retail shop with set hours? Before buying a business, consider the personal commitment and how it will differ from your current job situation. If you've never run a business before, consider buying a franchise that offers more operational guidance and set policies and procedures. Location and industry are big factors in deciding what type of business to purchase. Also, getting up to speed on a job in a new field may require a further investment in training and education.
Find out why the owner is selling the business
Early in the evaluation process, ask why the business is up for sale. Are the owners retiring? Do they want to switch careers? Do they want to back away from day-to-day management to pursue other endeavors? Discussions with the current owners should also include questions about how much time they're putting into the business — so you can better decide whether you can do the same.
View the opportunity from the inside
One way to find out how the business is currently run is to become part of it on a temporary basis. Shadowing the owner for several days or weeks allows you to evaluate the processes and the training level of current employees. You'll also develop a feel for the overall company culture and decide whether the company is a good fit for your managerial skills.
Investigate the business's financial condition
Before committing to an acquisition, it's vital to acquire a full understanding of the company's finances and market value. At the point where you're seriously considering a purchase, ask for the advice of independent financial advisers. Call on accountants, tax professionals, and legal experts to evaluate the pros and cons. Small business advisory organizations like SCORE can also offer a mentor to help those looking to head into new business ownership.
Understanding debt, assets, and cash flow when buying an established business
Even if you consider yourself to be financially savvy, professionals with expertise in small business can provide valuable insight and may even catch nuances in the financials that you've missed. Financial professionals examine everything, from the company history to its current financial position, by measuring asset values, revenue streams, and cash flow projections. Tax professionals who keep up with the latest legislation can offer recommendations about the purchase and reorganization of a business into a more favorable structure.
Valuing an existing business for sale
An owner selling a business will ask for a price they believe makes a deal financially worthwhile for them. They will also offer information to support their asking price, such as the company balance sheet, cash flow statement, and sales data. Many factors come into play when valuing a business for sale, and different methodologies may be employed. In addition to physical assets and sales numbers, a company's brand and reputation may often contribute to the worth of the business. The balance sheet values are a good starting point, but true insight is only obtained with a deeper analytical dive into the company.
Explore financing options for buying an existing business
If you don’t purchase a business all in cash, one financing option is a business acquisition loan, which is structured for the purpose of buying an established business or franchise. Other options include secured or unsecured bank loans, or SBA loans, which can be obtained through a traditional lender but are backed by the U.S. Small Business Administration. You may also consider applying for a business line of credit to manage cash flow fluctuations as you acquire and make changes to an existing business. You may also want to fund part of the purchase with crowdfunding or seller financing. And finally, if you don't want to take out a loan, you can seek the financial support of an outside investor or try to partner with another business in exchange for a partial ownership stake.
Buying an established business can be one of the best ways to get a jump start on entrepreneurial success. If you've dreamed about owning your own business and need financing, consider finding capital through business loans.
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