When most people think of starting a business, they think of beginning from scratch--developing your own ideas and building the company from the ground up.
But starting from scratch presents some distinct disadvantages, including the difficulty of building a customer base, marketing the new business, hiring employees and establishing cash flow...all without a track record or reputation to go on.
Buying an Existing Business and Learning How To Buy A Business That's Profitable
In most cases, buying an existing business is less risky than starting from scratch. When you buy a business, you take over an operation thats already generating cash flow and profits.
You have an established customer base, reputation and employees who are familiar with all aspects of the business.
And you dont have to reinvent the wheel--setting up new procedures, systems and policies--since a successful formula for running the business has already been put in place.
On the downside, buying a business is often more costly than starting from scratch. However, its easier to get financing to buy an existing business than to start a new one.
Bankers and investors generally feel more comfortable dealing with a business that already has a proven track record. In addition, buying a business may give you valuable legal rights, such as patents or copyrights, which can prove very profitable.
Of course, theres no such thing as a sure thing--and buying an existing business is no exception.
If youre not careful, you could get stuck with obsolete inventory, uncooperative employees or outdated distribution methods. To make sure you get the best deal when buying an existing business, be sure to follow these steps.
The Right Choice
Buying the perfect business starts with choosing the right type of business for you. The best place to start is by looking at an industry with which youre both familiar and which you understand.
Think long and hard about the types of businesses youre interested in and which best match your skills and experience. Also consider the size of business you are looking for, in terms of employees, number of locations and sales.
Next, pinpoint the geographical area where you want to own a business.
Assess labor pool and costs of doing business in that area, including wages and taxes, to make sure theyre acceptable to you.
Once youve chosen a region and an industry to focus on, investigate every business in the area that meets your requirements. Start by looking in the local newspapers classified section under Business Opportunities or Businesses for Sale.
You can also run your own Want to Buy ad describing what you are looking for.
Remember, just because a business isnt listed doesnt mean it isnt for sale. Talk to business owners in the industry; many of them might not have their businesses up for sale but would consider selling if you made them an offer.
Put your networking abilities and business contacts to use, and youre likely to hear of other businesses that might be good prospects.
Contacting a business broker is another way to find businesses for sale. Most brokers are hired by sellers to find buyers and help negotiate deals.
If you hire a broker, he or she will charge you a commission--typically 5 to 10 percent of the purchase price. The assistance brokers can offer, especially for first-time buyers, is often worth the cost.
However, if you are really trying to save money, consider hiring a broker only when you are near the final negotiating phase. Brokers can offer assistance in several ways.
Prescreening businesses for you. Good brokers turn down many of the businesses they are asked to sell, whether because the seller wont provide full financial disclosures or because the business is overpriced. Going through a broker helps you avoid these bad risks.
Helping you pinpoint your interest. A good broker starts by finding out about your skills and interests, then helps you select the right business for you. With the help of a broker, you may discover that an industry you had never considered is the ideal one for you.
The negotiating process is really when brokers earn their keep. They help both parties stay focused on the ultimate goal and smooth over any problems that may arise.
Assisting with paperwork. Brokers know the latest laws and regulations affecting everything from licenses and permits to financing and escrow.
They also know the most efficient ways to cut through red tape, which can slash months off the purchase process. Working with a broker reduces the risk that youll neglect some crucial form, fee or step in the process.