By: Aspen Grams, Marketing Strategist
If you’re looking to leave the corporate world and start a venture of your own, buying an existing business can be a great option. The benefits are numerous! You don’t have the burden of creating a new business idea, dealing with startup costs, or establishing your brand. With a for-sale business, the current owner already cleared those hurdles for you. However, you do need to research certain aspects of the business to find a great fit. This article outlines three factors to consider before buying an existing business that will ensure you make a sound investment.
The Business Financials
Pay attention to tax returns and current profit and loss records. These will give you a clear idea of sales trends, expected income, and the overall health of the business. However, declining sales aren’t necessarily a sign of a poor deal. The owner may have intentionally slowed their business as they neared retirement or shifted their focus to other business ventures. They may also have invested in a new piece of equipment. If you work with a business intermediary, they will discuss the financials during your scheduled buyer meetings.
The Existing Company Details
When researching a prospective business, consider the details of the company. Is it product- or service-based? Does it currently have inventory and working equipment? Your industry knowledge, working capital, and amount of time available to invest will determine if a business is a good fit. If you have more of the first and less of the latter two, a business that is turn-key ready is a better option. Beyond that, look into the management team. A capable and loyal team will allow for a smoother transition.
The Business Growth Strategy
It’s important to consider the growth strategy of before buying an existing business. You want to have a clear idea of both the current sales landscape and the growth opportunities available to you. Look into these four things to get a better understanding of the potential return on investment.
Current Client Breakdown
Firstly, what is the current client breakdown? You want to see diversified and evenly distributed accounts as opposed to a small handful of large accounts. On the off chance that the transition causes you to lose an account, you want the assurance that it won’t put too large of a dent into your bottom line.
Secondly, is there a current marketing plan in place for sustainable sales growth? A good plan outlines targeting efforts for existing customers , budget allotment for new customer acquisition, implementation of current initiatives, and any available growth opportunities you can capitalize on as you step into the role of owner.
Thirdly, is the business model scalable? Put simply, if you add to your operating costs (i.e. utilities, marketing, administrative salaries, rent, etc.) at the same rate you grow revenue, then your business doesn’t scale. However, if further revenue requires relatively smaller and smaller additions to operating costs, then the business scales. Assess the business to ensure that it has the potential to multiply revenue with minimal, incremental costs over time.
Existing Business Reputation
Lastly, does the company have a sound reputation? If the company you’re looking to buy has been involved in scandals or has a history of treating its customers poorly, you’re going to have an uphill battle on your hands. Browse online reviews, check with the Better Business Bureau, and look at customer feedback for the company’s track record.
Purchasing an existing business has much less risk involved than starting from scratch, especially when you consider the number of businesses that fail within the first five years and the number of variables that cause their downfalls. Buying the business from an owner who has successfully navigated the pitfalls gives you a leg up on your new venture. Beyond that, you start with an established customer base, reputation, and cash flow.
Consider financials, company details, and the growth strategy before buying the existing business. Consequently, you will be sure to meet your financial goals and fulfill your entrepreneurial dream. If you want to start the process, you can view our current listings or contact one of our intermediaries. We can find the perfect fit for your next business!