Tuesday, 5 February 2013

Why Launch a Business When You Can Buy One?

You can minimize the risks associated with starting a business from scratch by purchasing an existing one. Here are four reasons why. 

At one point or another, most of us have experienced the urge to do something entrepreneurial. The chance to be master of your destiny and your investments can be alluring.

It can also be very frightening! We’ve all read about the high failure rates for new startup businesses. 

The reasons for this reality are numerous. Insufficient operating capital, bad management, incompetence, strong competition, weak customer base, poor business concept or even just plain bad luck highlight the long list of things that can be detrimental to any new business. Furthermore, new business owners need to manage a multitude of details, such as product and service positioning, branding, marketing, employee hiring and training, site location, choosing vendors and establishing terms, to name just a few. Even when all the stars are aligned and correct decisions are made, it can be months or even years before a startup begins to see positive cash flow. 

Imagine if the potential pitfalls of a startup could be significantly reduced for you as a business owner. Well, they can! By purchasing an existing business instead of trying to start one from scratch, a buyer can dramatically minimize the risks associated with startups.

Benefit #1 - Make money on Day 1: Successful existing businesses have a proven track record of profits that generally continue long after the business has been sold.

Unlike most startups, you will be making money on your new business the day you take over. Plus, in many cases business buyers have different skills and expertise than the exiting seller. As the new owner, you can take the business to even higher profitability by incorporating new ideas, know-how and energy. This can be advantageous for entrepreneurs who envision opportunities to explore an innovative product, new market or technology. And the existing cash flow can help fund their new ideas.

Benefit #2 – Stay focused on your long-term goals: Taking on a business with a well-known name, location, product mix, knowledgeable employees, etc. will enable a new owner to focus on long-range strategic planning rather than day-to-day minutiae.   

There will be no suffering through an extensive startup period as you struggle to attract customers to your business. Existing business owners will tell you at great length the sacrifice they made in the early years as they literally took responsibility for every job in their business. You can avoid months, and sometimes years, of long hours, marketing failures, unpredictable revenue and expenses most typically associated with startups. Existing businesses with a history of success have already identified an ideal pricing model and marketing formula, and boast experienced employees and a company culture which can take years to figure out successfully. While there will be potholes to avoid along the way, as a new buyer you can dedicate most of your time to building new product lines, customers, or technologies.

Benefit #3 – Leverage your buying potential: Existing businesses can be very attractive because buyers are typically able to use the seller’s financing to leverage their purchase.

A major reason for startup failure is a lack of capital, which is often a result of limited available financing and the inability to predict the amount of capital required. Seller financing can resolve both issues. In other words, with only a pre-determined portion of the asking price down, buyers can use the cash flow from the business to pay off the seller over a negotiated period of time. This ensures that the buyer can minimize their up-front investment, maximize the bang for their investment dollar, and share some of the risk with the seller by ensuring they have a vested interest in your success.

Benefit #4 – Get training through a transition period: A new owner can negotiate a time frame within which the previous owner will stick around to ensure a smooth transition.

Whether or not you’re familiar with the industry, the market or the business you are buying, having the support of the one person who knows these things best can prove invaluable. In many cases, business owners recognize they can add value and marketability by providing for a transitional training period. Not to mention the importance of the business’ legacy, which will give the current owners further motivation to help during the changeover. Additionally, the issue of seller financing will ensure the sellers want to do everything they can to ensure the success of the new owner.

Once you’ve decided to buy a business, the question then becomes which one.

After narrowing your choices to a manageable few, take your time to make sure you can comfortably see yourself in the shoes of the former owner. You should be able to get an intimate understanding of the owner’s motivations for selling and have a chance to review information regarding the financial performance, staffing, facilities, equipment, inventory, product lines and customer base of the business.

Then take the next, and often most difficult step: make an offer!

Do you have a small business question you would like answered about this article or others?
Bill Sivell is a salesperson with VR Windsor Inc. [www.vrwindsor.com] 519-903-7807, which sells businesses to buyers across Canada and around the world. His 14-year career includes diverse senior management positions in marketing, advertising, sales management and operations management. His blog appears every Tuesday.


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