There are obvious advantages to buying a pre-existing business rather then starting one from scratch. There is risk either way. Your decision depends heavily on the amount of risk you’re willing to incur. Keep in mind, the old adage: “if you fail to plan, you plan to fail,” applies to both.
Advantages of buying a pre-existing business:
An existing business already has a proven track record, and should be generating revenue to where you will be able to give yourself an immediate income.
In most cases, the current owner is willing to train because he or she wants to see the company or business they worked so hard to build continues to succeed.
Additionally, if the current owner is offering owner-financing, it is in his or her best interest to make sure the new owner can handle the business.
With an existing business, the current owner has generally figured out what works and what doesn’t. If the business you’re seeking to buy is being sold because of financial difficulties or struggles, you can talk with the current owner to find out why. Sometimes it’s as simple as an owner not being able to commit the time necessary to grow the business.
An existing business is a package deal. Everything is already in place; employees, equipment, vendors established, clientele established and hopefully a good reputation established.
Financing is easier to secure on an already established business, since the financial institution can look at the business’s record to determine its financial stability.
What to look for when buying a preexisting business:
This depends on the type of business or industry you are considering investing in. My one-word is very simple: Research! The more research you do, the more questions you’ll have and the more questions you ask, the more you are able to minimize your risk.
A couple of standard things to look for are:
Look at the past, current standing and potential of the business/industry to establish its future. Where is the industry trending? Remember video stores and VHS tapes? Imagine buying a video rental shop in 1999. The trend was headed toward DVDs, which would require a great deal of investment in new inventory. Know where your industry is heading before you buy.
· Location. Does the business depend on foot traffic for survival? If so, is its location good? Has the town’s “hot” spot (where your new business is located) moved, taking clientele with it? The business’s financials will demonstrate a downward trend if this is true. If visibility is not important, then how is your new business’s location centralized to the clientele it is catering to?
· Competition. Who is your competition? Where are they in proximity to your location? Are any of them getting ready to move into the area?
· Reputation. What is this business’s reputation with vendors, customers and the community? Don’t take the current owner’s word for it. Ask around.
· Internal operations of the business. How is this business structured? Are there benefits? Are employees happy? Is there heavy turnaround?
· Financials. You will want to have a CPA review the last 3-5 years of financials and 1 -2 years of monthly P&L’s.