Starting a business from scratch is not the only way to achieve the American dream of business ownership. Every year hundreds of thousands of business owners get their start by buying an existing business.
Here are four reasons you might be better off buying an established business instead of building one from the ground up.
1. Proven track record you can examine.
As opposed to the unknowns of starting a business, an existing company has a track record that you can study in detail. Before investing your money, you will be able to review the financial records, tax returns, contracts, leases and more. This makes it so you won’t have to make guesses about the strength of the competition or the desirability of a particular location.
After a detailed investigation there will be very little you don’t know about a business. Speculation, assumptions and blind guesses will be minimized. If you don’t like what you find out about a particular business, fine. Don’t invest your money in that business. Just move on to the next one that is for sale.
2. The best possible training is available.
If the seller has financed part of the sale price he has a vested interest in your success. It is in everyone’s best interest for the seller to stay on for a training period after the sale is complete.
Even as little as two weeks of on-the-job training can make a big difference to a new owner. Free, hands-on training – provided by the person who knows the business best. There is no way to get this type of priceless education when you start a business from scratch.
Sometimes the most valuable education you get from a seller relates to the mistakes they've made. Even the most successful business owner has tried some things that didn't work. You can benefit from their experience and avoid some of their mistakes.
Also, many existing businesses come with a core of trained, knowledgeable and experienced employees. It’s hard to overstate the value of the insights and experiences these employees already have. Not to mention the value of the relationships they have built over time with your new customers.
3. Immediate cash flow.
When you buy an existing business it will produce income for you on day one. When starting a business it may take months before turning a profit – if that soon. You can make an educated guess about how soon you will turn a profit, but that is still a guess.
Because you will have immediate cash flow, your need to borrow money for operating expenses should be less. But if you do need to borrow, the guesswork will be reduced because you will know how much cash the business is producing.
4. Work with the friendliest bankers in the world.
Most small business sales are only possible because the seller offers to finance part of the price, often more than 50%. No banker, angel investor or financier will be as motivated to lend you money as is the person trying to sell you his business.
Here are two important points to keep in mind about seller financing.
- First, be realistic. The owner of a thriving business will not have trouble finding a buyer. So don’t expect to get 100% financing on a great business. Or even an average business.
- Second, don’t get discouraged if a seller demands 100% cash. That is common when an owner first puts a business on the market. But deals with 100% cash up front are only slightly more common then deals with zero cash up front.
So if you find a business you like but the owner demands more cash up front than you can afford, don’t give up. Keep in touch with the seller. Three to six months down the road, if that business hasn't sold, the seller may be more willing to meet you halfway.
Usually the sale gets done because both the buyer and seller have their feet firmly planted in reality. And in most cases that means the seller will provide partial financing to the buyer.
These four advantages all contribute to one overriding benefit – they help to reduce the risk involved in going into business. They don’t eliminate your risk, but they do help to reduce it. And that may be the best reason for you to buy your dream business instead of starting it.