The trend has taken a twist in the early 21st century. Now, many laid-off executives are pursuing their entrepreneurial dreams down a somewhat different path: they’re buying businesses that already exist.
Why buy an existing business?
Buying an existing business gives you a head start. It can be less risky, and individuals may see a profit sooner than when starting a new company from scratch. The business may come with a recognized market position, an established customer base, experienced employees, and established systems.
The purchase of a solid business generally will include some “good will.” You should compare that cost to how much working capital would be needed to enter into the same market and get to the same point of positive cash flow. If you structure the acquisition strategically, that immediate cash flow can provide a reduced risk of business failure.
However, buying an existing business isn’t risk-free. Your success depends on how well you analyze the business you ultimately buy. Begin with a strategic plan, and be prepared for the search to take several months.
Your plan should include contacting a professional business broker, searching through your own contacts and networking, contacting trade associations, and cold calling current owners of the kind of business you want to own. Use multiple approaches in your search; call your attorney, your accountant, your banker, your friends, and even your neighbors. They just might come up with the perfect match.
Do your due diligence
As you go about finding your business, consider the following:
- What’s the owner selling?
- Why is the owner selling?
- How much does the owner want, and how was that price determined?
- Is there financing or trade credit to go with the deal?
- Why is this a good deal?
Once you’ve “kicked the tires” and found the right company, begin the due diligence phase. There’s no such thing as too much information. Once the acquisition is complete, you won’t have a chance to go back for clarification. Obtain advice from professionals outside your areas of expertise; talk with your attorney and accountant.
Find the funding
Financing the purchase of an existing business generally is easier than financing a new business start-up; you should have access to more sources than just your own personal savings. The buyer of a going concern often has immediate cash flow to service the proposed debt.
Don’t expect the bank to finance the entire purchase. You’ll have to come up with some equity to support your commitment. Remember, your return on your investment is unlimited, while the bank’s is not. Your banker wants to know that you’re taking a fair share of the risk. For credit-worthy investments, banks generally will finance 75 percent of real estate values, 50 to 75 percent of equipment values, 75 to 80 percent of accounts receivable, and 25 to 50 percent of inventory.
While it makes sense to look for a bank that frequently participates in the Small Business Administration (SBA) loan programs, don’t hesitate to look for other sources of financing—such as the seller of the business. Other sources include vendors, angel investors, venture capital firms, family, and friends. Closing the deal usually involves multiple sources of financing, along with your own investment.
Every entrepreneur starts with an idea. Carefully incorporating your idea into an existing business can help minimize risk and maximize success. TPW