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Buy or Start a Home-Based Business?

Written by: Kate Lister

Article Overview: When it comes to starting a home-based business from scratch, the unknowns can be daunting. One alternative you might consider is to buy an existing business.

Free Download - Small Business Grants -- Fact or Fiction By Kate Lister

Buy or Start a Home-Based Business?

When it comes to starting a home-based business from scratch, the unknowns can be daunting. One alternative you might consider is to buy an existing business.

Of course, that's no slam-dunk either. You always have to wonder why someone would be selling a perfectly good business. Is it an "opportunity" or someone else's headache? Beyond what the owner or the broker tells you, you need to look for real reasons the owner is selling. Is the business cash poor? Is it past its prime and now on the way down. Has something temporarily boosted income or reduced costs in the past couple of years? Is there a new competitor on the scene? Is a regulatory change looming? Are costs on the way up? Is something threatening to make this company obsolete?

As a buyer, you need to take a close look at the companies financial statements for hints about what's really going on. You have every right to review the tax returns for the business you are buying as well as the financial statements and supporting documents such as agings of accounts receivable (what the small business is owed from customers), and accounts payable (what the small business owes to its vendors -- and if the operator is paying within terms). If you're not comfortable evaluating the numbers, have someone do it for you. This could be the biggest opportunity of your life or the biggest mistake.

Unfortunately, you can't believe everything you see. Even copies of tax returns have to be suspect. That why, for example, based on the demonstrated lack of integrity of many sellers, all tax returns are verified with the IRS when banks are processing SBA loans.

The internet can provide you with background and access to research data on most industries. We just discovered our local library provides free access online to InfoTrac, a collection of over 47 million full text articles from 4500 magazines and most newspapers going back to 1980. Industry membership organizations and franchises are a great source of information too.

If you want to borrow money, a lenders primary concern will be the company's historical cash flow. If your seller claims they "really make more than we report", it's not going to convince your lender unless you can actually document the missing income.

Remember that a lender will not finance 100% of your new venture. You'll need to: put down at least 25-30% for most lenders; demonstrate that you have the talent and experience to run the business; and show that historically, the business generated enough cash flow to pay off the loan.

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Article Tags: business cash, competitor, copies of tax returns, financial statements, franchises, free access, full text articles, good business, great source, home based business, industry membership, irs, local library, membership organizations, regulatory change, sba loans, scratch, slam dunk, source of information, starting a home based business

About the Author: Kate Lister
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I started out in banking and spent six years as a commercial lender with two of the nation’s largest banks. Pantyhose convinced me to start my own home-based consulting business. But even running my own business I was still wearing them. So after 8 more years a former Navy flyer convinced me to trade my business suit for a flight suit and we bought a biplane for air tours. Over the next 16 years we became the oldest and largest barnstorming business in the country. Along the way we wrote two books: Finding Money--The Small Business Guide To Financing and The Directory of Venture Capital, both published by John Wiley & Sons. Surprisingly, both the writing and the flying we did mostly from home in our underwear, thanks to 25 eager (and fully dressed) pilots who replaced us in the air as the company grew. Now we're working on a third book, Undress For Success: The Naked Truth About Making Money From Home, and a website with oodles of useful info at Undress4Success.com

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