Business Buying Pros and Cons
Business Buying Pros and Cons
Pros of Buying a Business
The following is a pretty comprehensive list of business buying pros. They are listed in no particular order of importance:
- A general structure and organization is in place already (You can always build on this or change it if necessary but I don't recommend any changes until you have run the business as is for a few months. There may be a good reason for why things are done a particular way.)
- There is an established customer base. (The best base is a documented one such as set contracts or known repeat and regular customers that will buy regardless of the owner. Be aware that this kind of customer base will also demand a premium regarding the business sales price.)
- There is an established supplier network. (You will probably have to prove your credit worthiness to them, but at least you don't have to hunt them down and you can always change to better suppliers.) Goodwill exists already.
- No need to buy equipment and furniture in most cases.
- Some training by the Seller is the norm in most cases if you desire it. (A few weeks to a few months is often negotiated as part of the deal for no additional cost. Further help by the Seller can also often be arranged for a fee.)
- No need, unless desired, to perform an expensive build-out of a location. In most cases you will just put your own personal touch to the existing physical business location.
- Experienced employees may be part of the purchase. (You should be fully aware of the Seller's role in the business and whether you personally will be replacing their role or if you need to hire someone else. If there are key skilled employees involved in the company, part of the deal should be the guarantee by the Seller to arrange for those employees to happily stay on.)
- You will have more financing options than with a start-up. (With good financial records and better yet with property involved, you will have a better chance with a bank loan than with a start-up. You also have the opportunity for Seller financing to avoid a bank loan. This adds to the viability of the business.)
- You will already have a way to pay for any loans through the profits of the business you have purchased. (Keep this in mind when determining how much of a loan you afford to taker versus putting in your own equity money.)
- Businesses that have the need for inventory will be ready to go without having to scramble to find suppliers and buy the inventory. (Be aware that some businesses do not sell with inventory included in the deal. Make sure you know how the inventory part will be handled and value the inventory accordingly for the purchase.)
All of this adds up to MOMENTUM. This is by far the main pro for buying a business instead of starting from scratch.
Cons of Buying a Business Instead of Starting from Scratch
The following is a solid list of business buying cons. They are listed in no particular order of importance:
- You may have just been sand bagged and saddled with bad vendor relationships.
- The Seller could have misrepresented the business. (Performing your due diligence correctly will avoid this issue 99% of the time. As a matter of fact, sometimes the Seller actual misrepresents the company by pure accident. Do not assume that because the business is successful that the Seller actually knows what he is doing. Many business owners are not good business people. I have witnessed countless times when the Seller truly believes what he is giving the Buyer is real financial numbers but they are off base enough to make a huge difference and nobody sees it until it's too late.)
- A purchased business will, in most cases, cost more money upfront than a start-up. (But a start-up will also have no income upfront.)
- There may be hidden limitations to the business such as a shrinking market or a soon to be bad location.
- You could be buying yourself a bad reputation that just did not come out of the wood work during due diligence.
- You may have bought yourself some very poor or very difficult employees that you must get rid of quickly and hope to replace just as fast with quality people.
- You may need to overcome a major disruption when the Seller leaves the business regarding vendors, employees and customers.
- The existing equipment and fixtures may be outdated causing you to buy new things right after buying the business. (With thorough inspections by you and a person experience in the equipment during due diligence will avoid this problem and allow you to negotiate a lower price in order to replace the equipment with less burden on your wallet.)
- The perfect business for you may not be fundable where a start-up may be. (Sometimes it's easier to start a cash based business from scratch since the equipment can often be financed through the help of a specialist. Whereas a bank won't finance the purchase of the established business due to poor and unverifiable record keeping.)
What's the Bottom Line?
The pros and cons to buying a business amount to this: Buying a business is not something to be taken lightly but done right, the advantages far outweigh the disadvantages. This is particularly the case for those potential business Buyers that have never owned and operated a business before. The monetary risk is high, but the running start you have by buying a business makes the risk worth taking. Your job is to make sure you prepare yourself before looking for a business and are ready to properly analyze any potentially good fits to your plan.
Business Buying Pros and Cons - To learn more about this author, visit George J Sierchio's Website.
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Hopefully this list of business buying pros and cons will give you a picture of what you are facing. It will also answer the question of: Why would anyone bother to buy a business instead of taking one from the ground up?
Pros of Buying a Business
The following is a pretty comprehensive list of business buying pros. They are listed in no particular order of importance:
- A general structure and organization is in place already (You can always build on this or change it if necessary but I don't recommend any changes until you have run the business as is for a few months. There may be a good reason for why things are done a particular way.)
- There is an established customer base. (The best base is a documented one such as set contracts or known repeat and regular customers that will buy regardless of the owner. Be aware that this kind of customer base will also demand a premium regarding the business sales price.)
- There is an established supplier network. (You will probably have to prove your credit worthiness to them, but at least you don't have to hunt them down and you can always change to better suppliers.) Goodwill exists already.
- No need to buy equipment and furniture in most cases.
- Some training by the Seller is the norm in most cases if you desire it. (A few weeks to a few months is often negotiated as part of the deal for no additional cost. Further help by the Seller can also often be arranged for a fee.)
- No need, unless desired, to perform an expensive build-out of a location. In most cases you will just put your own personal touch to the existing physical business location.
- Experienced employees may be part of the purchase. (You should be fully aware of the Seller's role in the business and whether you personally will be replacing their role or if you need to hire someone else. If there are key skilled employees involved in the company, part of the deal should be the guarantee by the Seller to arrange for those employees to happily stay on.)
- You will have more financing options than with a start-up. (With good financial records and better yet with property involved, you will have a better chance with a bank loan than with a start-up. You also have the opportunity for Seller financing to avoid a bank loan. This adds to the viability of the business.)
- You will already have a way to pay for any loans through the profits of the business you have purchased. (Keep this in mind when determining how much of a loan you afford to taker versus putting in your own equity money.)
- Businesses that have the need for inventory will be ready to go without having to scramble to find suppliers and buy the inventory. (Be aware that some businesses do not sell with inventory included in the deal. Make sure you know how the inventory part will be handled and value the inventory accordingly for the purchase.)
All of this adds up to MOMENTUM. This is by far the main pro for buying a business instead of starting from scratch.
Cons of Buying a Business Instead of Starting from Scratch
The following is a solid list of business buying cons. They are listed in no particular order of importance:
- You may have just been sand bagged and saddled with bad vendor relationships.
- The Seller could have misrepresented the business. (Performing your due diligence correctly will avoid this issue 99% of the time. As a matter of fact, sometimes the Seller actual misrepresents the company by pure accident. Do not assume that because the business is successful that the Seller actually knows what he is doing. Many business owners are not good business people. I have witnessed countless times when the Seller truly believes what he is giving the Buyer is real financial numbers but they are off base enough to make a huge difference and nobody sees it until it's too late.)
- A purchased business will, in most cases, cost more money upfront than a start-up. (But a start-up will also have no income upfront.)
- There may be hidden limitations to the business such as a shrinking market or a soon to be bad location.
- You could be buying yourself a bad reputation that just did not come out of the wood work during due diligence.
- You may have bought yourself some very poor or very difficult employees that you must get rid of quickly and hope to replace just as fast with quality people.
- You may need to overcome a major disruption when the Seller leaves the business regarding vendors, employees and customers.
- The existing equipment and fixtures may be outdated causing you to buy new things right after buying the business. (With thorough inspections by you and a person experience in the equipment during due diligence will avoid this problem and allow you to negotiate a lower price in order to replace the equipment with less burden on your wallet.)
- The perfect business for you may not be fundable where a start-up may be. (Sometimes it's easier to start a cash based business from scratch since the equipment can often be financed through the help of a specialist. Whereas a bank won't finance the purchase of the established business due to poor and unverifiable record keeping.)
What's the Bottom Line?
The pros and cons to buying a business amount to this: Buying a business is not something to be taken lightly but done right, the advantages far outweigh the disadvantages. This is particularly the case for those potential business Buyers that have never owned and operated a business before. The monetary risk is high, but the running start you have by buying a business makes the risk worth taking. Your job is to make sure you prepare yourself before looking for a business and are ready to properly analyze any potentially good fits to your plan.
Business Buying Pros and Cons - To learn more about this author, visit George J Sierchio's Website.
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George J Sierchio Video - George J Sierchio - There are a few reliable sources of finding businesses for sale. There are also some awful sources. Take a look at my tips on how to best find a business to buy.
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