Published June 26, 2006

Buying an Existing Business: What You Should Know

Starting a business from scratch is a great idea for some people, but not for others. Many people start businesses from scratch because they love the "edge-of-the-seat" excitement of establishing a brand, envisioning great things for the future, and living the thrilling (sometimes scary) life of an entrepreneur. But not everyone wants that. It can be stressful at times, or costly. A small mistake made early on can cost big-time later.

One alternative is to buy a business that already exists. Let's look at the advantages and disadvantages of buying a pre-existing business.

Advantages

  • Established customer base.
  • Products and services are already developed, along with a way of doing business.
  • Name recognition exists.
  • Assets are already in place.
  • Theoretically, income can be earned from day one.

Disadvantages

  • Higher initial cost than starting a business from scratch.
  • Stated reason for selling the business could be different from the real reason.
  • Starting a business from scratch lets you develop your own systems; an existing business already has a "way of doing things" that may be entrenched in the customer's mind.

Depending on the size of the company, some people equate the business with the owner; a change in owner could mean lost business because they consider you to be a completely different company. When you are looking at the business you want to buy, here are some things you'll want to uncover:

  • Why is this person selling the business? (Is the reason they say they're selling it the real reason?)
  • What has been the income, expenses, and profits for each year the business has been running? What trends do you notice? (Are some years leaner than others? Why? Are expenses going up? Why? Is income declining? Why?)
  • Will there be an immediate income?
  • What agreements has the owner entered into with vendors and retailers?
  • Will any of the equipment need to be replaced?
  • Will you need to be qualified for outstanding leases to be transferred into your name?
  • Are the business practices acceptable to you and if you change them, will there be any backlash? (One example might be invoicing policies: if the owner currently expects payment in 90 days and you want payment in 30, will you lose customers over it?) Even if you find a business you like - and have big dreams for - it doesn't have to be a perfectly oiled machine for you to buy it. In fact, some people make a lot of money by buying businesses that are not doing so well, fixing them up, and selling them again. In fact, this is a very profitable business on its own!

So now you have three options. Do you:

1. Start a business from scratch?

2. Buy an existing business that is doing well?

3. Buy an existing business that is doing poorly and fix it up?

Each option requires its own set of skills from an entrepreneur. What skills do you have to see one of these options to profitability?