The huge majority of all business fail within the first few years of opening. The reasons can vary greatly, from inexperienced operators, to a bad location, to a product that nobody wants. One way to minimize these risks as an entrepreneur is to acquire an existing business. Most likely, you will be purchasing a business that has already made it past the initial dangerous period. While your future still rests in your own hands, you are stacking the deck in your favor. Here are some of the advantages of purchasing an established business.
There have been enough sales to support the company up to this point, so that is a good sign that there is demand for the product or service. Additionally, when you buy an existing business, you can often begin cash flowing immediately since the company will already have receivables and customers in the pipeline. Usually when you purchase a business, you also receive a list of all of the current and past customers, which can have a lot of value in itself. With a little creative marketing, you can often generate more income from past customers that haven’t been utilized in awhile.
Licenses and Zoning
When you are buying an existing business, the current owner has already done a lot of legwork for you. Most people don’t factor in the time that it is going to take to apply for licenses, research requirements, check zoning regulations, submit business applications, etc. Depending on the business, this can be a costly and extensive process, that may put the business on hold for months before they can even begin operating. You should always double check to make sure that the business is following current requirements, but it can be a major bonus already having a lot of the work completed for you.
Unless you have a lot of experience in the type of business that you are purchasing, you will typically negotiate a training period of working with the seller to learn everything you can. When you start a new business, you have to figure everything out on your own, potentially making very costly mistakes. While you aren’t guaranteed a university level education, everything that you can learn from an industry veteran is going to be very valuable as you begin your path as an entrepreneur.
An existing business will typically have a group of suppliers that they work with, and a history of ordering with those suppliers. This can often work to your advantage, allowing you to negotiate lower prices, financing terms, and more, which can dramatically help your cash flow. As a new startup, suppliers are usually going to make you pay for your products up front until you build credit and earn their trust. That just means that you are going to have to come up with more money out of pocket to sustain your business until it is generating income.
As with any venture, there are also potential downfalls to purchasing an existing business as opposed to starting your own. You might pay more for an established business than you would if you started it on your own, or you might pay less because you can avoid a lot of costly amateur mistakes. Additionally, you need to be extremely thorough with your due diligence. While most small business purchases are structured as asset sales to reduce buyer liability, you still want to make sure that you are fully aware of what you are buying. Utilizing a competent attorney and accountant during your purchase can help prevent a lot of future headaches. But in the end, whether you choose to purchase a business or start your own, your success ultimately rests on your own shoulders. And that is the thrilling part about being an entrepreneur!