Post written by: Kim Cedarstrom, Realtor© commercial, residential, business sales, Consultant firstname.lastname@example.org
Why should you pay someone to buy their existing business when you can start your own? There are times when it may be better or necessary to start your own business, but it does make sense to buy an existing business in most occasions. Why? I’ve always held that the main advantage of buying an existing business is cash flow. There should be a documentable level of sales and a sales history with an existing business. Even if the sales are declining, at least you should have a baseline to work with. In fact if the sales are declining, it might be a great time to buy as a new owner can often fix problems and inject new enthusiasm, ideas, and capital and turn things around quickly. When you start a new business you start from scratch. That’s ZERO. You have no idea (or at least not a provable idea) of what it will do. Also, an existing business has done the heavy lifting of obtaining permits, licenses, and has met local and federal code requirements. You are in business immediately! Zoning boards usually meet only once a month and it always take at least two meeting for them to make a decision. Planning and engineering to meet requirements can consume months and thousands of dollars plus the pain and suffering they will put you through. I’ve done this several times and believe me it’s like making sausage-you don’t want to watch. Also regulatory and developmental factors may prohibit starting from scratch – for instance finding the land to start a new marina in the lakes region of NH would be extremely difficult and current regulations would prohibit building on the scale needed to be economically viable. If you want to own a marina, you better plan on buying one. Another consideration is funding. Almost all small business loans will require some form of guaranty from the SBA. I don’t know of any banks who will lend money to new businesses without some form of guarantor, sometimes a cosigner but mostly the SBA. So here’s the fun part- the SBA considers a new business to be at least three years old. So your startup will have to be self funded or you will need an angel/backer. One of my best mentors in this craft had a great saying “backers always back out” and I’ve found it true. If you are planning a start up, plan to have to fund it yourself. Most good marketable existing businesses will be fundable. You will still need down payment money, but at least some of the purchase should be bankable. Another advantage of an existing business is that they have experienced the growing pains that are inevitable in any business. There will still be surprises, but the major labor pains will be behind you.
To recap, the advantages of buying an existing business are:
1. Cash Flow is immediate and established.
2. All the planning and meeting of regulations is done.
3. There is a better chance of being fundable.
4. The business is mature.
When is buying a business not a good idea? If your idea is new and unique or if there are no existing businesses in your desired field available. Some new and fresh ideas have to start from scratch and that’s great. Just be ready for the uncertainty.