5 Reasons Why You Are Better Off Buying an Existing Business Than You Are By Starting One From Scratch.
Starting a business from scratch is one way to achieve the American dream of business ownership, but with it, comes with a whole lot of risk.
Every year, approximately 400,000 new businesses open their doors, and about
38% of them close within the first year.
64% of them close by their third year.
84% of them close by the end of their 5th year.
Leaving a success / failure rate of 84%/16% and this begs the question, why would you want to risk it all for a success rate of 16%, when you can buy an existing business with much better odds of success?
On the Flip Side, there are about 200,000 existing businesses that sell each year, and the success ratio is much higher because the hard part has been done – a customer base has been established, and there is a cash flow.
In this article, I am going to share with you: Five Reasons Why You Are Much Better Off Buying An Established Business Instead of Starting One From Scratch.
1. Proven Track Record Lessens Your Risk
An existing company has a track record that you can review.
Before investing any money, you have the ability to review the financial records, tax returns, contracts, leases and more. This removes much of the guesswork, identifies risk, uncovers opportunities, recognizes the competition and the good or bad of the business location.
After a detailed investigation (Industry speak, it is called Due Diligence), there will be very little you don’t know about a business. Speculation, assumptions and blind guesses will be minimized. If you don’t like what you find out about the business, no harm, no fowl – walk away without risking a penny and look for one that works for you.
Buying an Existing Business has a proven track record you can count on.
2. On The Job Training
If the seller has financed part of the sale price he has a vested interest in your success. It is in everyone’s best interest for the seller to stay on for a training period after the sale is complete.
Even as little as two weeks of on-the-job training can make a big difference to a new owner. Free, hands-on training, and personal introductions to existing customers by the seller is very valuable. There is no way to get this type of introduction to customers or education when you start a business from scratch. The value in this is almost priceless.
The seller will also share with you some of the mistakes they have made, because they don;t want you to make them. Remember … if they are holding a little financing, they have a vested interest in your success because they want you to pay them.
Every business owner has made mistakes – learn from them without making them yourself.
You can benefit from their experience and avoid some of their mistakes.
Buying an Existing Business has built in training.
3. Trained Management
Many existing businesses come with a core group of trained, knowledgeable and experienced employees. It’s hard to overstate the value of the insights and experiences these employees already have. The value of the relationships they have built over time with your new customers is huge, and the insights and ideas they can bring to the table can have great value to help you take the business to new heights.
Buying an Existing Business has trained management.
4. Immediate Cash Flow.
When you buy an existing business it will produce income for you on day one. When starting a business it may take months before turning a profit . You can make an educated guess about how soon you will turn a profit, but that is still a guess.
When you buy an existing business, you have immediate cash flow. The amount of money you will need in reserves for operating expenses should be a lot less, and if you need to borrow, the guesswork is reduced because you know how much cash flow the business is generating. Buying an Existing Business has immediate cash flow.
5. Easy Financing and Terms.
Most small business sales are only possible because the seller offers to finance part of the sale. The amount of seller financing varies. Lately, however we have been experiencing between 30% and 50% of the sale price has been n the form of seller financing. Buying an Existing Business has easier financing
No bank will be as motivated to lend you money to buy a business than the person selling you theirs.
The best part of seller financing is this …. the seller believes in the business and knows it will generate enough revenue to pay them!
Beware of a seller who demands all cash and wants to disappear into the sunset!
Two very important points to keep in mind when it comes to seller financing.
- Be realistic. The owner of a thriving business will not have trouble finding a buyer. So don’t expect to get 100% financing. The seller wants you to have skin in the game.
- Don’t get discouraged if a seller demands 100% cash. That is common when an owner first puts a business on the market. Approximately 75% of all business sales involve some sort of seller financing. The ones that sell for all cash are,for the most part, distress sales and the buyer is paying pennies on the dollar to solve a problem for the seller.
If you find a business you like but the owner demands more cash than you can afford, be patient. All Cash Buyers are few and far between. Keep in touch with the seller. It has been my experience ant within 3 to 6 months, you phone will ring and the seller will want to sit down and make a deal.
There you have it – my opinion, the 5 Reasons Why You Are Better Off Buying an Existing Business Than You Are By Starting One From Scratch.
Contact Us Today if you’re considering Buying an Existing Business