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Existing Cash FlowAs we all know in business, cash is king. For the small business owner, it can be a lifeline! Imagine starting the business of your dreams only to find that it will take two years to break-even and then another two years to become profitable. In the meantime, how will you pay your bills or invest back into your business so it can grow? This is the type of scenario that can kill many new businesses. You start off with a passion for your business, but you become deflated by financial reality. When you buy an existing business, the money is already flowing and has been for a number of years. There will likely be no break in cash flow unless something disastrous happens or is on the horizon. All in all, with existing cash flow, you’ll have one less stress to deal with when trying to establish your business as a success. Established Customer Base and Market ShareIf you are looking to purchase a business that has enjoyed longevity, there’s a good chance they’ve also enjoyed strong sales and a decent amount of market share. If the owner has been paying himself and others while keeping the business afloat, there’s sufficient evidence that the business has a steady stream of customers and sales. If you decide to start a brand new business, you’ll have to put money, time and effort in your marketing strategies with no doubt. Also, while you're waiting for your “book of business†to materialize, you’ll still have the pay the bills. All businesses require some sort of working capital in order to operate. A Proven Business ModelAn existing business that’s been around for more than a few years, essentially has a proven business model. As a start-up, you are trying to prove a hypothesis: customer will want my XYZ. But the existing, established business has proven that customers will buy. It’s the reason they remain in business. This can be especially true of franchise operations. They have replicated success probably thousands of times over with a system and formula that works. For example, a Subway restaurant that is successful in Chicago can also thrive in San Francisco or Atlanta. With franchises, not only are you buying a proven business model, but you are securing vendor relationships, general business support and marketing opportunities that can help make your franchise successful. The less you have on your plate as a small business owner, the better. Trying to start a new business with the burden of having to generate sales, maintain sufficient cash flow while training employees to competency and vetting capable vendors could be a recipe for not only failure but total burnout. Take the stress off and consider buying a valued existing business establishment instead of starting from scratch. A Recognized Brand IdentityAnother benefit of buying a business is also buying a name brand that’s already recognized by the business community. Over a period of time, the business has built a reputation through marketing, social media, endorsements, and referrals. It has credibility, and unlike a start-up, it doesn’t have to convince new customers to try an unfamiliar brand. An Infrastructure That Is Already In PlaceCompared to startups, which can require an enormous amount of time and money establishing a functioning business, an existing business is already up and running. One of its most appealing attributes may be its ideal location. Whether it’s in a thriving business district or in a popular shopping center, its location may be a key element to its success. In addition, an existing business already has operational necessities, such as furniture, fixtures and equipment needed to provide products and services. Most established businesses also already have some sort of internet presence, such as a website, social media followers, and referrals from online reviews and recommendations. Trained Employees and Established VendorsHaving trained employees and vendors at your disposal will help your business hit the ground running. People and other businesses already familiar with your industry and business can be a huge help while saving you time and money. Typically, trained employees have great insight to processes and systems that will help your business run smoother. Existing vendors will know your business cycles and product ebbs and flows so they can be available and ready to serve your business without interruption. The less time you have to spend hiring, training and grooming your employees and vendors, the more time you can spend improving other parts of your established business. Startups require an investment with no immediate returnStarting a new business requires working capital for operating expenses, such as rent, materials, equipment, not to mention advertising and paying employees. A start-up doesn’t have any customers either. It has to spend time and money promoting itself and convince customers to buy its products or services from them instead of someone else. Buying an existing business offers many advantages over a startup. If you’d like to know more about buying an existing business, read The BizBuySell Guide to Buying a Small Business for more information. Then, go online to BizBuySell, the Internet's largest marketplace for buying and selling a small business, and find your next business venture. Bob regularly writes about small business transaction trends and best practices, including case studies on the real people that have successfully navigated the purchase or sale of their own business. Bob is a seasoned digital marketer with a high level of insight into small businesses and their operations, having owned and grown small businesses throughout his career. By Trent Lee, the recipient of the award as the No. 1 business broker in the country by the International Business Broker Association (IBBA). gettyWhen someone says they want to go into business for themselves, often the first things that come to mind are cash-strapped 80-hour workweeks and the high failure rate of starting a business from the ground up. But going into business for yourself doesn’t have to start this way. There are real benefits to allowing someone else to put in those startup hours and prove the concept and then stepping into their role. In this article, we will explore the advantages and disadvantages of buying an existing business. These will vary depending on your skill set and the business you consider purchasing, and your success isn't guaranteed, but the failure rate of companies younger than five years is so high. You need to carefully weigh the pros and cons of buying an existing company. Pros 1. It's A Proven Concept One of the biggest challenges when starting a business is the unproven concept. How will the market react? How will you attract customers? And more importantly, can you do so predictably and profitably? Finding an established company with consistent revenue and profitability may be the easiest way to go into business for yourself. 2. Financing Is Often Easier Traditional bank loans typically have underwriting criteria related to time in business and debt service ratios that by their very nature require historical revenue. It is often easier for a business to get financing when it has a proven track record. Couple traditional bank financing, which often includes working capital, with some portion of seller financing, and a bank could help you buy an existing business with as little as a 10% down payment. 3. You May Save Time And Money Starting a brand-new business is often difficult from the standpoint of time and money. You need the time and money to perfect the product or service and establish a proven marketing and customer acquisition model. An existing business should have already tested all the different marketing channels and hopefully will have already found what works and what doesn’t. This can allow you to go into the business and increase what is already working. 4. Access To A Database Of Existing Customers An established business will already have a database of customers, and as a new owner, you can turn your attention to establishing deeper relationships and further monetizing them. It's almost always cheaper to work with existing customers rather than acquiring new customers. At the same time, you can continue to advertise the business and grab new market share. 5. Immediate Cash Flow Unless you have significant capital, building a business from the ground up can take its toll. It’s one thing to come up with a novel business idea with some college buddies and start up a company from your dorm room. If you are in this situation, a startup can be a good option. But if you have financial responsibilities, such as a family to provide for, buying an existing business can give you the immediate cash flow you may need. Part of the process of buying an existing business is doing your due diligence and your own financial forecasting and analysis. Determine what livable wages you need, and then make sure that the business has enough cash flow to support you and continue to fund operation, debt servicing and growth. Cons 1. It May Be Hard To Know All The Facts It's unfortunate, but not everyone is as honest as we want to give them credit for. For this reason, you need to really dig into the business's financials and ensure that the owner is being forthright and upfront about everything. If not, you run the risk of purchasing someone else’s problems. You may benefit from hiring professional help for this. 2. Potential For Old And Outdated Equipment Often businesses are sold because the current owners either can’t or won’t put in the time, effort and money to continue improving and growing — this includes taking care of equipment. Part of your due diligence should be inspecting all equipment and machinery. Make sure things are in good working order and haven't been neglected. 3. The Existing Company Culture May Not Be The Best Employees and company culture can often make or break a business. Make sure you assess current employees and the state of the culture so you know whether you'll need to take steps to improve. 4. Past Due Payroll Or Sales Taxes In my experience, payroll and sales tax payments are often missed prior to and during changes in business ownership, and the new owner can get stuck with them. Make sure that you have clearance from your local tax jurisdiction to avoid any type of successor liability, even if the sale is an asset sale. Be sure that you are purchasing a business without any unknown liabilities. 5. You May Lack Industry Experience And Expertise To step in and not only continue to maintain business success, but also take it to the next level, you ideally want to have expertise and experience in the business niche. As a business broker, I get calls weekly from people wanting to buy a business — anything that makes money, they say. I don't recommend this approach. Buying an established and profitable business could be a secure and quick way to get into business for yourself, but you’ll have to weigh the pros and cons of each scenario and make the best decision for yourself and your future. |