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.
You give yourself a better than average chance of success when you go through a proper planning process and surround yourself with capable advisors. You should do that whether you buy or start from scratch.
It’s false when you look at safer options like deciding to start small. Going part-time and working your way up is one such example. If you go this route your will avoid paying the potentially large upfront purchase price.
Few of us can pay cash upfront for a business. It would require us to take on debt to get started. Debt is certainly a poor choice. Did you catch that? Debt is always a BAD idea.
Debt means that even after covering all your costs of operations you still have to make payments on that debt before paying yourself. This increases your risk and the possibility that a downturn in your markets puts you out of business.
Debt also eliminates many options you might otherwise have. It will make you a slave to the lender. Most of us starting business wanted to leave the world of the wage slave. That was a great idea … but going into the realm of the debt slave isn’t any better, it’s worse.
Sometimes, buying an existing business makes good sense. An established small business in a solid market, purchased at the right price, can be a great way to go. But don’t buy potential alone. Many a seller will try to convince you about the future, what he hasn’t done yet, but might. The business must have already proven itself. To see if the purchase is a reasonable deal for requires 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 final thoughts on buying a business. Buying someone’s business puts you in a defensive posture. In business that isn’t always what you want. When buying, you acquire your seller’s customers, employees, and culture. Is that so bad?
It’s difficult because you will have to move out the bad, unprofitable, or slow paying customers. Same goes for the employees. The bad or low character and the low performing ones will hurt your business. They need to go. The culture will need to change from that of the prior owner to you. You do things differently and expect other results. In my own life I have seen this take at least three years and it’s never been a good time.
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.