6 Reasons to Buy an Existing Business

Ready to become an entrepreneur this year? There are several paths to entrepreneurship you could consider, such as starting a business from scratch, buying a franchise, or buying an existing business. 

You may not know which of these is the best fit, but not to worry. In this article, we’ll look at some reasons why buying an existing business might be for you.

Buying vs. Starting a Business

While starting a business from scratch allows you to call the shots from the beginning, there are a few reasons this might not be the best fit for you, especially if you already run a business and have limited time to launch another.

A brand-new, unproven business may struggle to find a foothold in a crowded market. You may find it difficult to attract new customers, so your finances might be tight at the start. 

Launching a new business is costly, too. If you’re renovating retail or office space, those expenses can quickly skyrocket, and then you’ll add the cost of staff, overhead, and supplies to the list.

With the cards seemingly stacked against a new business owner, it’s no wonder 20% of small businesses fail in the first year. But before you despair, let’s look at another option.

Why Buying an Existing Business Might Be a Good Idea

Rather than starting a completely new business, consider buying one that is already established. You’ll avoid some of the struggles I covered in the last section, and there are also plenty of benefits.

1. The Business Has Already Proven Itself

Whereas a new business doesn’t have a track record of success, an existing business does (otherwise, why would you buy it?). You can quickly look at the business’ financials to see how much revenue it’s brought in, how many clients it attracts, and how much profit it realizes.

2. It Has an Established Customer Base

Again, a business that has been in operation for a period of time already has customers. You can continue to serve those customers, assuming you keep things more or less as they’ve come to expect. You can, of course, also bring in new business to enhance revenues.

3. It May be Easier to Get Financing

When it comes to taking out a business loan or finding investors, many banks and investors are hesitant to invest in a brand new business because, yet again, it doesn’t have a history of success, and therefore the risk is greater. But with an existing business, you have the financials to show that the company is stable and that you will be able to pay back the loan.

4. It’s (More or Less) Turnkey

Buying an established business means you are inheriting employees who already know how to do their jobs. Software that’s already set up to do what it needs to do. Vendor relationships. There are fewer variables to set up when you buy an existing business than if you start one from scratch, and that means you have fewer things to worry about.

5. It’s Probably a Faster Path to Profitability

While no business is guaranteed to make a profit, buying one that has already seen comfortable profit margins may help you get there faster than with a brand-new business. Just carefully study the “recipe” for success that the previous owner had and stick to that, along with any modifications you think will enhance business.

6. The Business is a Known Entity

Whether you’re buying a neighborhood steakhouse or an online shopping brand, the business is already known and respected. Previous marketing efforts and participation in community events helped pave the way for you. You can simply introduce yourself as the new owner and assure your audience that you intend to carry on the traditions the business has established.

What to Consider Before Buying an Established Business

Before you jump to buy the first business you come across, keep reading because there are a few things to consider before buying.

Find Out Why It’s For Sale

There are, of course, many reasons a business owner would sell a business that shouldn’t set off a red flag, such as retirement or wanting to move to Portugal. But in the event that the business is struggling, you want to know what you’re getting into before investing. (And PS, a struggling business isn’t necessarily one to run from if you’re willing to put in the work to turn it around.)

Look at Actual Costs

You need to have a solid understanding ahead of time of the full investment you’ll have to put into an existing business. There’s the sale price of an established business — and then there’s the money you’ll have to put into it. It might be as simple as a coat of paint and new chairs, or you might have to hire more qualified people, invest in software, and do a complete overhaul of the warehouse. So, know what you have to put into the business so that you know how much you need to cover your initial investment.

Research Competitors

How many similar businesses are there within a few miles of this location? What kind of marketing are those businesses doing? It’s a smart idea to know what you’re up against in terms of competition if you buy this business so you can understand just how much you’d need to invest in marketing and advertising to compete.

Look at the Numbers

Don’t take the current owner’s word for it that business has been booming for years; you need to see profit and loss statements, as well as other financial statements that give you a clear picture of the financial health of this company. 

Has the business taken out a loan? Does it have other debts, or has the company filed for bankruptcy? Even if you are buying only assets and won’t be assuming the debt, it’s important to understand why that debt was incurred (ex., are there inventory or cash flow issues?). All of this will impact you as the new owner.

Get the Company Valued

The owner may ask a price that is far beyond its actual value, so have a professional valuation to understand what the business is actually worth.

Also, have your accountant look at these numbers, as well as the financial statements, as he may be able to better understand any concerns you should have.

Ask Yourself How You’d Improve the Biz

You might luck into buying a business that needs zero changes to thrive, but more likely, you’ll buy a business that could use a little spit and polish. That might mean finding more efficient processes, hiring a manager, investing in software, changing the products or services, or changing the prices. Map out what those changes might look like before making an offer.

Shadow the Owner

You can only learn so much by reading financial reports, so roll up your sleeves and spend a few days shadowing the current owner. This will give you an understanding of her relationship with her employees and customers, as well as what a day in her life looks like.

Final Thoughts

While buying an established business may offer you the opportunity to own a tried-and-true company, it will still require a lot of hard work and investment. Be prepared to give it a year to let the dust settle on the changes you’ve implemented.