Buying an Existing Business: Is it Right for You?
Have you ever considered starting your own business but dreaded some of the headaches that come with getting a new company off the ground? Well, you might consider buying an existing business instead. Although this path isn’t talked about as often, there is a thriving market for buying and selling small businesses. In fact, according to The Washington Post, more than 7,800 small businesses changed hands in 2016, marking an all-time high.
With that in mind, let’s take a look at what you need to know about buying an existing business, including how to find business for sale, the pros and cons of this approach, how franchise opportunities differ from acquisitions, and what to consider once you do take the reigns.
Finding Businesses for Sale
Before we get into why you may or may not want to buy an existing business, you may be wondering how you even go about finding businesses for sale. As it turns out there is no single answer to that question. However you do have a few options and some resources that can help you in your search.
Choosing what kind of business you want to buy
As you set off on a search to find a business for sale, it’s important to consider what type of business you would like to own. There are several factors that can go into making this decision as well as few questions you should ask yourself. For example some business owners might pursue a business that reflects their passions and hobbies while others might look toward companies that are seeing growth and let current trends guide the way. Meanwhile others might simply look for a business that can be run in their spare time, allowing them to live a certain lifestyle. All of these methods are valid as long you do the proper research to ensure that your prospects are viable.
Of course another factor that comes into play when pursuing buying a business is location. After all, while you might dream of opening owning a sporting goods or outdoor store, you might find that there’s no such outlet for sale in your area. Similarly entrepreneurs leading some of the hot trends might not be looking to sell just yet as they continue to ride the wave. Because of this, you may be forced to decide whether you want to relocate in order to find your perfect business, settle for something else, or perhaps start your own venture.
Asking friends, family, and owners
When looking for businesses-buying opportunities, one of the most natural places to start is by asking friends and family if they know of anything you might be interested in. Obviously your success with this method will depend greatly on your connections but you never know what you might find. At the same time, you’ll want to be careful about who you share information with, lest you find yourself a prime target for multi-level marketers wanting to share their “exciting business opportunities” with you (it happens).
Another direct and simple idea is to ask the owners of a business you’d be interested in running if they’d consider selling. While it may be a shot in the dark, it may get them thinking and a deal could eventually start to form. That said, “eventually” could be a keyword as it may take time for them to first make a decision and then work out the details. Still, once again, you never know when the answer to your hypothetical question just might be “yes.”
Since the level of serendipity discussed above is rare, it’s likely that most business buyers will need to look to other options in order to find something for sale. This being the digital age, one great resource for researching prospects is the Internet. More specifically BizBuySell is one online marketplace where you can search various businesses and sort by location, category, and more to see what’s available. What’s also great about this option is that listings include all sorts of helpful data, including ask price, financing details, and even why the current owner is looking to sell.
Beyond sites like BizBuySell that specifically list businesses for sale, keeping an eye on the latest news online might also lead you to a great opportunity. An example of this is that local news sites might report when business owners announce their intents to sell. Additionally business journal publications operate in many cities and, given their beat, can be a great source of “business for sale” news.
Working with business brokers
If you’re looking for some assistance when it comes to shopping for businesses, you might consider contacting a business broker. Not only will brokers have insight into what business are on the market but will also be able to help you close the deal. Essentially you can think of them as real estate agents for businesses.
If you’re a first time buyer or just don’t want to have everything on your plate, having a business broker to assist you could prove extremely valuable. However you’ll want to be sure you know what services your broker offers, what fees they charge, and have a clear understanding of whether they represent you, the seller or both in the financial transaction.
Due diligence and additional services
Even if you are working with a broker, it’s imperative that you still do your own due diligence as well. This means researching all you can about a business, including various news stories, review sites, and social media (more on that later) to get a better understanding of what you’re buying into. Of course, while all of that is important, what you’ll really want to dive into are the business’s books and other finances. For that, you might want to call in some professionals.
Before closing a deal to buy a business, there are several different people you may want to hire to help you out. This list could include a business lawyer to look over the contract, an accountant to review all of the financials, a business appraiser to peg the current value of the business, and even a building inspector to ensure the storefront itself is up to code and in good condition. Granted there may be some overlap in some of these jobs but you’ll want to make sure you’re well covered. Remember: buying a business is a big investment. Because of this, it may be worth spending a bit more in order to protect yourself.
The Advantages of Buying an Existing Business
Now that you have a better idea of how the business buying process works, it’s time to talk about why this could be a good move for you to make. Keep in mind that a lot of these points are subjective and can also differ from business to business. Still, on the whole, here are some of the perks that come with buying an existing business.
Perhaps the biggest advantage to buying an existing business is that much of the legwork it takes to get a business up and running has already been accomplished. Moreover, in most cases, you’ll likely be buying a business based on the success they’ve seen, meaning they’ve already been able to prove their market concept, build a brand, and attract customers. This isn’t to say that there won’t be challenges in trying to keep that positive trajectory going, but you will hopefully have a head start.
In addition to having customers practically built into the purchase price, you’ll likely also have the benefit of acquiring a knowledgeable staff. Not only does this save you the headache of hiring but also gives you a team you can rely on to help you learn the ropes of your new business. All of these can be important factors — especially when you’re new to the whole “owning a business” thing.
Although closing a deal to buy a business can take time, the good news is that, once everything is settled, you can jump into running your new business right away. This reality stands in stark contrast to the experience of starting a new business, where owners may spend months prepping for their big opening day. Some business sellers may even refer to their operations as “turn-key,” meaning it’s ready for you to simply come in and get going. Again, this doesn’t mean you won’t have any changes to make or challenges to face but it does often allow you to cut through a lof the B.S. that comes with building a business.
Unless you’re sitting on a big pile of money, chances are you’ll need some sort of financing in order to buy your business. While that’s no different from starting a business, banks and other lenders may view purchasing an existing business more favorably than they would starting a new one. As a result you may have an easier time obtaining financing, which can be a major factor in your business options.
The Drawbacks of Buying an Existing Business
Just as there are upsides to buying into an existing business, there are a few drawbacks that need to be discussed as well. Once again, these can also vary depending on your situation and some can be avoided by doing proper research ahead of time. That said here are some potential reasons why buying a business might not be right for you.
Skeletons in the closet
Sure being an established brand can be a good thing but it can also mean there’s some baggage associated with your business. For one you may not realize that the business you’re pursuing has started to gather a negative reputation. This could be the result of an owner/manager with less than ideal customer service skills, subpar review and/or health department scores, or other controversies. Personally I always think of such issues when I see “under new management” signs on store awnings and can’t help but wonder what kind of reputation the previous regime must have had.
Especially in a culture dominated by social media, it may be hard to separate the sins of previous ownership from the name on the door. This is to say that some past issues may still present themselves when you least expect it and could even sink your ship, as it were. Therefore you may want to dig a little deeper when doing your due diligence and see what PR problems may be lurking under the surface.
The cost of purchase
Since existing business have already established a brand (for better or worse), you’ll likely have to pay a premium on that advantage as part of your purchase price. As a result you may end up investing far more upfront than you would if you were starting from scratch. At the same time hopefully the brand recognition and pre-established operations that come with buying an existing business make the added expenses well worth it.
Lack of customization
Those with a true entrepreneurial spirit and vision may find the idea of buying an existing business limiting. Although there may be opportunities to put your own stamp on your newly-acquired business, it may be too far along in the process to make any major changes with much success. Because of this, if you really want to have control over every aspect of your business, it may be best to start one instead of buying.
Not all of the customization limitations are creative, however. In some cases the choices the previous owner made could affect your finances. For example your purchase could mean being locked into a lease that you believe is overpriced. Similarly you may have existing contracts with vendors that weren’t properly negotiated. These issues may be correctable in time but they’re definitely something to watch out for before you buy so you can be prepared.
Up until this point, we’ve looked at differences between buying a business that’s already established and starting your own from nothing. However there’s actually another option somewhere in the middle that deserves discussion as well: buying a franchise. Without further ado, let’s dive into the concept of franchising and what the pros and cons of this model can be.
What is a franchise?
Franchising is a business model where existing brands allow entrepreneurs to open and manage their own stores under the company’s banner. A classic example of this are various fast food locations. Although McDonald’s is a large corporation and may operate some corporate stores, many of their locations are actually owned by individuals who license the right to use the McDonald’s brand and serve their products.
Despite restaurants being perhaps the best-known application of the franchise model, there are several other businesses that offer similar arrangements. In fact it’s not just jumbo-sized brands that offer franchise opportunities but many successful smaller companies as well. That said, just as due diligence is imperative when it comes to buying a business, you’ll also want to research any franchise opportunity both in terms of their fees (more on that in a minute), what services they provide to franchisees, and the health of the company overall.
In many ways, opening a franchise is kind of the best of both worlds. This is to say that you get to open your own business from the ground up but also get the built-in brand recognition that can help you to attract customers before you even open your doors. Because of this, many entrepreneurs have found success with franchising and it’s not uncommon for some individuals to own multiple franchise locations.
Another benefit that often comes with owning a franchise is that you’ll have the support of a corporate team that can help guide you through some operational challenges. On that note, you’ll want to vet the company you plan to franchise from to not only understand what assistance they’ll offer you along the way but also ensure that your business visions and ethics align. Assuming you have a strong corporate backing in place, franchising can be a great way to “earn your wings” as a budding business owner, perhaps gaining the knowledge and insight necessary to launch future businesses solo.
Even if you have a corporate team that has your locations best interest at heart, some franchise owners may grow frustrated with their inability to change certain aspects of their business. Although franchisees do have some wiggle room with which to get creative in, your franchisor may have strict rules and guidelines you must adhere to. In fact one of the first stumbling blocks you may encounter is that the franchisor isn’t willing to open in a location in the area you prefer. Because of this you may either need to compromise and swallow your pride and look elsewhere.
Turning to finances, another major downside that comes with franchises are the various fees. In addition to having to pay an upfront fee to buy the rights to a location, you may also be responsible to cover build-out costs and other expenses. Once your location is open for business, the fees don’t stop. For many franchises, you’ll have to pony up a percentage of your sales as a royalty fee to the franchisor and may also have to chip in for advertising and marketing costs. Keep in mind that the types of fees each franchisor charges can vary so be sure to learn what you’re getting into well ahead of time so you can weigh your options.
After You’ve Made Your Business Deal
So you’ve made the decision to buy a business — congratulations! As a new business owner, there are a couple more things you should think about. This includes making a plan for a smooth transition and preparing for a potential exit down the road.
Tips for transitioning
Once the ink is dry and the keys to the business are in your hands, the real work begins. Not only are you now responsible to keep the success of the company going but will also need to learn the ropes along the way. Moreover there may be some transitional considerations you may not have thought about.
If you’re taking over a business with an established staff, you’ll want to be mindful about how to make the best first impression with them. At the most basic level this could mean introducing yourself, getting to know them, and gaining an understanding of their role. Going beyond the basics could also mean asking your new staff for their insights and having them share what they know about the business. While it may be instinctive for new owners to want to change things right away, taking on a more observatory role and getting feedback before making sweeping operational changes can set the foundation for a smoothly run business. Remember: at this point, your staff will likely know the day to day operations of your business better than you do.
Another decision you’ll want to weigh is whether it makes sense to promote your new ownership or not. As mentioned, hanging an “under new management” banner may seem harmless enough but it may serve to give current customers pause — even if they didn’t know the old owners. While making an event of the business’s change of hands may make sense in some cases, other times it’s best to let the shift go unnoticed.
Making your own exit
As we discussed, buying an existing business can be a smart option for first-time owners who want to get their feet wet. However, as time goes on and you grow into your position, you might start to consider opening another business. In these cases you do have a few options, including opening another location of your existing business, starting a new venture and splitting your time, or perhaps bidding adieu to the business you once bought. While this may be a bittersweet prospect, if it is time to make your exit, just think of how your experience with the business helped further your aspirations and look forward to doing the same for another budding entrepreneur.
Being a business owner doesn’t necessarily mean you have to start from scratch. In fact, for many, the option to buy an existing business may be more appealing. While there are pros and cons to all paths — including the potential to franchise a business instead — ultimately it’s up to you to decide what makes the most sense for your career, your goals, and your family.