Starting a business of your own can pay great dividends, but it’s important to
understand that the risks can be significant. The majority of start-up businesses
just don’t make it. According to Michael Gerber, author of The E-Myth Revisited,
40 percent of new businesses fail in the first year and 80 percent fail within five years.
On the other hand, purchasing an existing business can reduce risk while creating
opportunities for future growth and increased profit.
There are a number of reasons to consider the purchase of an existing business
rather than starting one:
Proven Concept. As a buyer you already know the process or concept works.
Existing businesses have a track record and financials that can be reviewed
so you are not just rely customer projections.
Brand. You’re buying a brand name. The on-going benefits of any marketing
or networking the
prior owner has done will transfer to you. When you have an established
name in the business community, it’s easier to grow the business and attract new
customers than with an unproven start up. That’s a real benefit that’s difficult to
put a price on.
Relationships. One of the most valuable and often overlooked assets of an existing
business is the company’s existing customer base and vendor relationships
that took years to build. It’s very common for the seller to stay on and transition with the
business to transfer those relationships to the buyer.
Focus. When you buy a business, you can start working immediately and focus on
improving and growing the business immediately. The seller has already laid the
foundation and taken care of the time-consuming, tedious start up work.
Starting a new business means spending a lot of time and
money on basic items like computers, telephones, furniture and policies that don’t
directly generate cash flow.
People. In an acquisition, one of the most valuable and important assets you’re
buying is the people. It took the seller time to find those employees, develop them
and assimilate them into the company culture. With the right team in place,
just about anything is possible and you will have an easier time implementing
growth strategies. Plus, with trained people in place you will have more
liberty to take vacation, spend time with family, or work on other business ventures.
When start-up owners and independent contractors go on vacation, the business goes too.
Cash flow. Typically, a sale is structured so you can cover the debt service,
take a reasonable salary, and have some left over to take the business to the next level.
Start up owners, on the other hand, often “starve” at first. Some experts say start-ups
aren’t expected to make money for the first three years.
Risk. Even with all these advantages, some entrepreneurs believe it is
cheaper, and therefore less risky, to start a business than to buy one.
But risk is relative. A buyer may pay $1 million, for example, for an established
business with strong cash flows of approximately $200,000 to $300,000.
Historical revenues show the cash flow can support the purchase price.
For many people, however, that is far less risky than taking out a $300,000 loan with an
unproven concept and projections that may or may not be realized.
No matter what you decide, put together a professional
seasoned team and look at businesses that are available and fit your lifestyle.
Gail Kennell, Top Biz Broker Business Broker
with Acquisition Experts, LLC provides professional services, to those
who want to sell or buy a business in South Florida. She can be reached at
954-410-0162 or gkennell@topbizbroker.com
