Why Buy and Existing Business
Vs. A Startup
It makes a great deal of sense to let someone else take the risk and high cost of starting a business from scratch. Its true that your initial investment in a start up can be substantially less than an established, proven business. However, more often than not, a new business has to have additional infusions of cash for several months or years before any income is realized. While an established business will give you an income from the first day you take over. According to government surveys, over 80% of new businesses fail in the first three years.
What should a buyer look for in a business?
Obviously, a buyer should consider only those businesses that they would feel comfortable owning and operating. Pride of ownership is an important ingredient for success. And obviously a buyer should consider only those businesses that can be purchased with the cash they have at their disposal. In addition the business must be able to supply enough cash flow after making payments on it to maintain the owners lifestyle.
What does it take to be successful?
First, a buyer needs adequate capital to buy the business and make the desired improvements while maintaining adequate working capital reserves to weather any slow periods. A buyer needs to be willing to work hard and, in most cases, to put in long hours. Smaller businesses are much different from larger businesses with trained support staff available to handle important tasks. In a small business a business owner may have to be the president, the janitor, errand boy, employee, salesperson, computer expert and accountant. Some buyers think they can buy a business and then just sit behind a desk and work on their business plans. Owners of small businesses, however, must be doers.
What Should I Pay For A Business?
Some people expect to find a terrific business (high profits, low risk, great potential, easy to run, no problems, etc). If such a business existed most people would not be able to afford it. The price would be too high, and they would be competing with well financed industry professional buyers to purchase such a business.
Methods for Pricing a Business?
1. 1 to 3 times annual cash flow (or owners benefit) but can vary widely depending on the desirability of the business. The lower the risk, the higher the multiple will be.
2. The market value (not depreciated book value) of hard assets of the business such as, furniture, fixtures, equipment, franchise agreements, real estate, inventory etc. plus one years cash flow.
3. 3 to 18 months gross sales, depending on type of business. Price is nearly always related to the owners benefit and can vary drastically depending on the terms agreed upon and the desirability of the business.
What's the Right Price?
The monetary investment you have in the business is the down payment. After that, the business pays for itself out of its cash flow. So, if you can buy a business for the amount you have for down payment and the business makes the debt payments and you still earn the desired profit then, the business is worth the price.
Food for thought;
Don’t let your friends, lawyer or accountant Kill A Good Deal. It is much easier and Less Risky for friends, lawyer or accountant to say “NO” rather than “Yes”. To you pursuing your dreams of buying a business. The final decision should be yours to make as to you purchasing the business or not.
Avoid Being Overly Cautious. Being too cautious may cause you to pass up a good business investment. So, do your homework, then Make a Decision, if you wait too long someone else may buy the business that was meant for you. If you have certain concerns, make sure you discuss them with your broker.
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