Should I Buy a Business Rather Than Start One?
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.
It’s true in that a business start up tends to have a high failure rate. However, most new businesses are poorly planned and prepared for. Make sure your business and ideas are well thought out and you will increase your chances for success.
Proper planning makes all the difference as does surrounding yourself with top notch advisors. You don’t go to the least expensive doctor when you have a serious problem, you want the best you can afford given your situation. This is true whether you buy or start from the ground up.
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.
Going into debt puts you in a difficult hole. After providing for all your operational costs you still need to make payments on the loan. Only then can you think about paying yourself. The banker will never be the last to get paid. This increases substantially your risk. It means that a bad market will put you out of business.
Debt cuts your options down significantly and will make you a slave to your lender. You wanted to leave the world of the wage slave … great idea … but don’t enter into the world of the debt slave. It’s not any better, it’s worse.
Sometimes, buying an existing business makes good sense. An established small business in a solid market, purchased at the right price, can be a great way to go. But don’t buy potential alone. Many a seller will try to convince you about the future, what he hasn’t done yet, but might. The business must have already proven itself. To see if the purchase is a reasonable deal for requires a review of its financial records.
Take a look at the last five years tax returns and talk with of the management of the business. You will likely be best served to have a business valuation done by a professional, a Certified Valuation Analyst (CVA).
Before incurring the cost of a valuation you or you and your accountant should review the financial information to see if there is even a chance that this business will work before hiring the valuation professional. Small businesses with a track record of five or more years have a lower rate of failure. Take into account the economic conditions though. A bad economy can change everything. Consider how the business will weather a difficult economic situation.
Some final thoughts on buying a business. Buying someone’s business puts you in a defensive posture. In business that isn’t always what you want. When buying, you acquire your seller’s customers, employees, and culture. Is that so bad?
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.
The many times I’ve gone down this road I really questioned whether it would have been easier to start a business from scratch. When you evaluate the business try to evaluate how many bad customers and employees you see and what kind of culture exists. The numbers aren’t enough, you will be running this business and it will take your time to change it. Understand the culture and the people and you will make a better decision.
Tags: Failure Rate, Time Endeavor, New Businesses, Lot