Buying a Business: The Safer Alternative

By Lil Sawyer

So you have made the decision to become an entrepreneur. Starting a business is no easy

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task. If you are serious about operating your own business, you might want to consider minimizing some of the anguish and pain associated with startups by purchasing an established business.Since many experts have predicted that a significant percentage of the workforce will be working in a self-employment capacity in the next decade, business ownership is becoming increasingly more important to many people.

For a financing perspective, you’ll have a much easier time securing capital from lenders by taking over an established business, than starting one from scratch. Not to mention, you’ll dramatically minimize the financial risk to yourself and your finance partners because the company will have proven revenue and a customer base. Many lenders will fund 50% to 75% of the acquisition cost for businesses depending on a number of factors such as the cash-flow numbers, assets and security available.

It is estimated that less than 10% of all start-up businesses are able to successfully secure the financing required at the outset. This is due to the high level of risk start-ups pose to lenders because every aspect of the business is unproven. Yet many people dream of the freedom and control over their own destiny that comes with owning and successfully managing their own business.

Buying an existing business or established franchise will dramatically reduce the risk when compared with starups since statistics estimate that 60% of start-up businesses fail within the first three years. Additionally it takes two years on average for a start-up to become profitable. Even comparing start-ups with such other options as home-based businesses or MLMs, in most cases, your chances of success are still clearly best when you buy an existing business. Outlined below are the ten primary advantages of business acquisition vs start-up:

1) Much lower risk of failure,
2) Business generates cash flow from day one (preferably positive cash),
3) Proven business concept and processes,
4) Proven products, services, marketing and sales strategies,
5) Established customer base providing referrals and references,
6) Established suppliers,
7) Trained employees in place,
8) Immediate credibility and perception of success,
9) Seller likely to lend support and may assist with

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10) Easier to secure affordable financing to complete the acquisition.

If the business has a positive cashflow, proven track record and perceived stability, it makes it easier to secure affordable acquisition financing. When starting a business, every aspect of the business is unknown. You don’t know who your customers will be; you don’t know how many employees you will need; you don’t even know if the business will succeed! With some many unknown variables, lenders have no choice but to reject the financing request, labeling it as “too risky”.

When you buy an established business, all of those “unknown” details have been worked out by the previous owner. An established business should already have a solid customer base, an experienced management team with proven processes and systems in place. Even if the company was not profitable in the past, your strengths may lend themselves perfectly to turning it into a viable company. At least you’ll have the ability to verify what the company did in the past that resulted in the current status of the operation. They’ll have employees who know the business inside-out. Most importantly, the buyer can have peace of mind knowing that he or she has invested in a business with a much higher likelihood for success.

The biggest challenge to buying a business outright is the initial purchasing cost and the business transfer costs such as consultants, lawyers, accountants and valuation specialists. Because the business concept, customer base, brands, and other fundamental work has already been done, the financial costs of acquiring an existing business is usually greater then starting one from nothing. Other possible disadvantages include the time and travel required to research the opportunities available and hidden problems associated with the business and receivables that are valued at the time of purchase but later turn out to be non-collectable. Additionally, many acquired businesses lose 5-10% of their customers in the first year after a sale.

Good research, careful planning and following the advice of wise counsel are the keys to avoiding these problems. You can avoid some of the pain associated with new management for the staff, suppliers and customers by negotiating a reasonable amount of time to transition from the current management.

It’s often more cost-effective to bring in specific expertise in mergers and acquisitions before the letter-of-intent stage is reached. In fact many acquisition experts believe that it is important to put your ‘resource team’ together early. That is to seek the advice and guidance of business finance experts, lawyer and certified accountant before you begin your search for an acquisition target. After all, most people are going to do this deal once, so it’s essential to do it right and put the best total package together to ensure a successful acquisition and success long term.

In order to buy the right business or franchise, you need to do a thorough investigation of its historical performance, its operations, current status, the staff and management, real estate, competition, the industry and its future potential. Once all this analysis has been completed, you will then have to determine how it measures up with your skill, expertise and leadership. All of which is so much easier to do with an existing business.

While there are no guarantees in business and the risks must always be managed, buying an established business clearly offers significant advantages worth considering if you want to own your own business.

Lil Sawyer is Managing Director of FundingLinks Inc.