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Buy a business or start one? It’s a question I hear a lot. Is it really safer to get into an existing business or start one? Most believe buying is the answer.
A business start up does seem to have a higher failure rate. This is often because of poor planning and preparation by the owner. If you think out and plan for your new business you’ll have reasonable chance for success.
The odds improve when you do proper planning and surround yourself with high quality capable advisors. You don’t go to the cheapest doctor when you have a serious problem, you want the best you can afford. You should keep that in mind whether you buy or start from scratch.
It’s not always riskier to start up if you look at other possibilities like deciding to start small. A part-time endeavor while keeping your regular job is one way to start and grow a business with less risk. You’ll keep from paying a large upfront price for an existing business and that is a more conservative approach.
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 reduces many other options you might have had. It puts you into slavery with your lender. When we started a business we wanted to leave the life of a wage slave. Wasn’t that a good idea? However, going into debt makes us a debt slave and that’s even worse.
Buying an existing business can be a good idea though. A well established small business in the right markets, purchased at the reasonable price, can be the route for you. Watch out for the owner who wants to sell you his future potential alone. They will try to tell you about the huge upside to what they have created, but haven’t yet done. You will have to accomplish that, so don’t pay them for the work you’ll do in the future! Only pay for what the business has already done. That said, you will need to review the financial information to see just what the business has in fact done.
I want to see five years tax returns and interview of the management group. It’s best to have a business valuation done by a professional, a Certified Valuation Analyst (CVA).
You or you and your accountant should review the financial information to see if there is even a chance that this business will spending the money on a valuation though. A small business with a track record of at least five years is more likely to succeed. They have figured out how to survive and hopefully thrive already. Don’t forget to look at the current economic conditions though. Bad economies can change everything. Evaluate how the business will survive a difficult economic situation.
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.
You will have to rid yourself of the bad, nonprofitable, or late paying customers. You will have to rid yourself of bad, low character, and under performing employees. And you will need to change the culture of the business from the prior owner’s to one with your unique imprint. My experience is that this can take three or more years and it’s not a lot of fun.
I’ve taken this journey many times and it often seems to be easier to start a business from scratch than buy. So take the time before you buy, look at how many undesirable customers and employees there are. What is that culture really like? Don’t just look at the numbers. You’re about to be the boss and will need to run this business. It’s a big investment of time and money to change the culture, employees, and customer group. Be wise and make a good decision.
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