Why Buy an Existing Business
The decision to buy a business often represents less risk than to start a new business from scratch.
Experts cite the following statistics.
If you start a business from scratch, you have a 90% chance of failure within 5 years.
If you buy into a franchise, you have a 50-50 shot at success 5 years from now.
If you buy an existing business, you have a 90% chance of still being in business 5 years from now.
Pros and Cons of Buying an Existing Business
There are many advantages to buying an existing business.
First, you have instant cash flow and a customer base from which to grow from. Usually, there is some goodwill or at least a good reputation from which to start your business.
Some disadvantages of buying an existing business include a potential lack of experience running a business within a specific industry. Also, employees can sometimes be unnerved by a sudden change in ownership, as can clients and vendors.
FAQ’s about buying a business
Where can you find businesses for sale?
Most businesses for sale can be found on any of the leading websites established just for the purpose of bringing buyers and sellers together. Websites like mergernetwork.com and bizbuysell.com are very popular with business brokers and people selling by owner.
Should you use a business broker?
Since a business broker often has access to all the listings in an area, they can greatly help with finding the right business for you.
The commission the business broker charges usually come from the business owner that is selling their business. Many business brokers have buyer’s programs where they will conduct specific searches for a buyer and the buyer pays the broker’s fee.
That type of engagement is called a buy-side engagement and is popular with business buyers who are looking for hidden opportunities within specific industries.
How do you value a business?
As a seller, you will want to take all the required financial information (at a minimum, 3 years of tax returns, 3 years of Profit and loss statements, and a current balance sheet) and work with your advisor to come up with what you think the business is worth to you.
There are as many as 15 different ways to value a small business. The most important way to look at the value of a business is the same way your banker looks at it. Otherwise, the banker will never fund the deal, and you won’t get to close on the business.