Is buying a business a good idea? There is no simple answer, but buying a business can either be a wise choice or a disaster depending on the industry. Buying a business comes with its risk, but typically the significant barrier of entry risk is lowered because of the preexisting establishment.
The start-up costs of a business come with time and money. It takes time to start a business and a significant amount of money for equipment, inventory, and employees. It's not uncommon for start-ups to not see a return on their investment for the first few months or years of operation.
When buying a business, that worry is out the window. Typically, the original business owner has already completed the burden of marketing, branding, and establishing a working strategy for the business.
It may sound too good to be true, and it might just be. Depending on what business you buy and whom you buy from, there may be things that weren't disclosed beforehand and may leave you in a position that isn't favorable.
How to Buy an Existing Business
Buying an existing business is as simple as finding a seller, sitting down and working out the agreements, and then committing to the purchase. The transfer process is very standard, along with the paperwork that comes with it.
Knowing what you're buying before actually committing to it is very important. When purchasing an existing business, you should be more focused on researching the industry itself. We've made a checklist of what to consider when buying an existing business.
Buying an Existing Business Checklist
Knowing the business's financial position: There is no reason to be surprised when a business isn't turning a profit. It's imperative to understand the business's financial position before purchasing it. Ensure that the business has stable cash flows.
Knowing how much a business owes to who is important. Sometimes a seller will sell a business off because they know their business won't be able to pay back all the debt they owe. Ensure this burden isn't passed on to you, or if it is, make sure you know what kind of burden you're taking on.
Knowing the location: Knowing why a business owner chose this location for their business is vital because that location defines multiple factors. Depending on the location, it could affect how the local community interacts or finds the business. The area also involves how many customers the business can reach and marketing options for those customers. Stay agile if you're also finding yourself in a new environment when buying a business. It's crucial to adapt and understand your new location quickly.
Why the owner is selling the business: The most crucial element on your checklist is understanding why the person is selling their business. Common reasons are moving on to start a new business or wanting to retire.
You should be looking for the red flags that are "too good to be true signs." Unfortunately, even an honest salesperson will exclude the truth. Not mentioning problems in a business unless people ask is a common tactic used to ensure a buyer. This philosophy is that if the person cared enough, they should have asked.
What Is Generally a Good Deal on Buying an Existing Business?
The natural question most people ask is, "How much money do I need to buy an existing business?" and honestly, it all depends on the industry. Generally, the more established and secure business, the more money you'll pay.
Regardless of the amount, it's always wise to look at your financial options. For example, you may want a small business loan.
Buying an Existing Business Example
An example of buying an existing business may be trying to purchase a food stall. The cost of that food stall may be significantly less to buy than, let's say, a car company like Tesla.
You can consider it an excellent deal if you buy a positively established, up-to-date business with all equipment and no outstanding balances.
Essentially, a good deal when purchasing a business may change depending on multiple factors. Still, at the same time, if the business you're looking to buy has taken care of all the complicated start-up costs and is turning a consistent profit, then you're looking at an excellent deal.
What Are the Pros and Cons of Buying an Existing Business to an Entrepreneur
Reduced start-up is the most appealing reason for entrepreneurs to buy an existing business, but what are the actual cost reductions from buying a start-up? It ranges to far more than we can list, but in general, the big cost-saver is the basic infrastructure of the business. For example, if you’re buying a property management company.
Having the infrastructure and foundation of a business will eliminate the majority of the hassle and research involved with something like property management.
- Cash flow
Something else to note that could be a significant advantage is the business's brand. It may already have good standing with the community, and therefore little to no changes would need to be made to see profits.
There are still inherent disadvantages of buying an existing business regardless of its ideal condition. Any change leaves people uneasy in one way or another, so it's necessary to understand that there may be resistance to new management.
Change in management and ideals may not be linked to employees and can cause a significant problem with new decisions. People usually have to earn their leadership roles, and not everyone will trust new management, especially if changes aren't to their liking.
Another concern is outdated equipment. Without proper knowledge of the industry standard, you may have a big bill to upgrade. Unfortunately, not every piece of machinery in the business you buy may be up to date.
Luckily, with research and asking the right questions, you can determine if this will be an issue and plan accordingly. Bringing this cost to the original owner before buying it may also get you a better deal.
Taking on Any Financial Burden of the Past Business
Taking on a business also means taking on their financial situation. Remember, a company is a living entity typically separate from its owners, carrying its debt and value.
It's essential to understand the financial position of the business you are purchasing, which means any outstanding debts it may owe to banks, loan providers, or customers. If the original owner fails to disclose some of these liabilities, you may take on more debt than you can handle.
About the Author, James Webster
James Webster, founder and Executive Chairman of ROK Financial has almost two decades of experience within the financial services industry. His passion for helping small business owners and his innovative way of thinking, has allowed him to run multiple successful businesses including National Business Capital & Services. Under the National name, the team was able to help secure over $1 Billion in financing for small businesses nationwide.