It is often thought that the safest way to get a business for yourself is to buy one rather than start one. That might not be entirely true.
A business start up tends to have a high failure rate. Part of this is because many new businesses are not well planned and prepared for. If your business and ideas are well thought out and you’ll have better 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.
Not many can pay cash for a business and are forced to take on debt to get started. Debt is always a bad idea. Let me say that again – debt is always a bad idea.
Debt puts you in the hole. It means that after covering all your operational costs you still have to make payments on that loan before paying yourself. The banker doesn’t plan on being last. This greatly increases your risk and the likelihood that down 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.
I typically like to see five years tax returns and do an interview of the management team. Your best bet is to have a business valuation done by a qualified 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 closing thoughts on purchasing a business. When you start a business you are on the offensive, building and growing. When you buy a business puts you are on the defensive. I’m not a fan of being on the defensive, are you? When buying, you take on the owners customers, employees, and culture. Let’s see why that is difficult.
It can be. You will have to unload the bad, unprofitable, or slow paying customers. You will have to trim out those employees with bad or low character, and the low performing ones. You also have to change the culture of the small business from the last owner’s to your own. My own experience has shown that to take three plus years and it’s never fun.
The many times I’ve walked this path lead me to question whether it really was easier to start a business from scratch rather than buy. Before you buy, try to evaluate how many undesirable customers and employees there are and evaluate the existing culture. The financials aren’t enough. You have to run this business and it will take plenty of your time to change its culture, employees, and customer group.
