Many people dream of owning their own business, setting their own hours, and being “the boss”. Some budding entrepreneurs find that it can be a smart move to invest in or buy an established business rather than starting their own. Depending on a number of factors, there can be considerably less risk in acquiring or investing in an existing business rather than starting one from scratch. Another way to limit your risk is to go with a successful business franchise.
As with most things in life, timing is an essential part of the decision to invest in an existing operation. The issue of timing applies to the market, the economic conditions, the investor/buyer, and the owner/seller. Here are a few tips to consider when investing in or purchasing an existing business.
The Market
One of the realities of the marketplace is the existence of cycles. The traditional axiom of “buy low and sell high” applies to all markets. In evaluating a business, it is important to evaluate whether a market is growing, at its peak, or in decline.
For example, this is not a good time to invest in or purchase a video rental store. On the other hand, a mobile phone franchise in the right location could see years of continued growth. The key is to step back and evaluate the overall trends of the specific business you are considering.
Economic Conditions
As with market cycles, economic business cycles play a large role in determining if it is a good time to buy or sell. Here, the right decision might be counter-intuitive. When market conditions are poor, sellers might accept a much lower price on their business. On the other hand, it might be more difficult to arrange financing if banks are on the sidelines.
The other side of the coin is to avoid investing in or buying a business at the peak of an economic cycle if the price is overstated. One of the worst situations in which to find yourself is to be paying the note on a business bought at a premium price when the economic cycle turns negative. Likewise, expecting a return on an investment made at a market peak can be a major disappointment.
Factors in Buying a Business or Franchise
Once the decision has been made to invest in or buy a business, time must be spent evaluating the franchise or business. With the thousands of businesses that are always on the market and seeking investors, it is important to avoid the emotional decision to go with the first “perfect business” you come across. Taking time to evaluate and perform the proper due diligence is essential.
While market and economic conditions are considered macro factors, the local economy and situation are micro factors. For example, a retail business located in a failing mall would indicate a problem for that particular operation.
Other factors to consider are:
- Why is the current owner selling? If it is a good profitable business, why would he sell? Obviously, health and retirement are two good reasons. Seeking new opportunities may not be. It may indicate that this opportunity is just about at its end. Obviously the owner knows things about his business that you don’t.
- Do you know anything about the industry? The best business to run is one you have experience in. If you have worked as an employee for a while you are more likely to succeed than if you don’t know anything about the business.
- Consider a franchise. Franchises have an established track record that you can easily verify and they have experience in helping new owners establish the business. Plus many franchises have a stake in your success since they get a percentage of the profits. Typically when we think of franchises we think of Fast food, but there are a wide variety of franchises available everything from Closets by Design to Maid services, to Meineke Muffler shops. Others include Lawn Doctor, Window Genie, Jiffy Lube, H& R Block, Dunkin’ Donuts, etc.
- Beware that buying a franchise can be a case of buying a boss. Depending on how much control corporate headquarters has, they can be very demanding, placing quotas, scheduling meetings, etc.
Entrepeneur.com provides a list of 500 franchise opportunities that can be sorted by home-based, low cost, fastest-growing, etc.
Compare Your Options- Franchise vs. Established Business
If you are considering a cleaning business you might consider ServiceMaster which provides commercial and residential cleaning and disaster restoration. It has start-up fees of between $50k and $170k. On the other hand, System4 provides only commercial cleaning services but only has start-up fees of between $6k and $38k. So be sure to compare competitors and check what you get for your fees in each one.
One disadvantage of a new franchise is that you don’t have any customers yet, so it will be up to you to build the customer base, while an established business has existing customers. So if you are buying an existing business, it is important to determine how many repeat customers the business has. Other things you are buying in an established business is the cash flow, the profitability, the “goodwill”, etc. But determining the value of all of these things can be difficult. On the other hand, in a franchise, it might be even more difficult because you are buying, name recognition, training, operating systems, etc. But often the operating systems are much more efficient than in a local “mom and pop” business precisely because they have been tested extensively by the corporate headquarters.
Due Diligence
When you purchase an existing business the previous owner has every incentive to make the business appear easy to run and extremely profitable. But the reality is often quite different. How many hours does he actually work? Are his bookkeeping records accurate? Is he paying people “off’ the books”? If he cheats on that, how do you know if you can trust any of his records? Will he sign a “non-compete” contract? Are there any outstanding liabilities or pending lawsuits against the company? Will he provide ongoing consulting? If so at what price? Are all of his accounts current with his suppliers? You should talk with some of them and get an idea of how the business is run. Also, talk to employees and customers. Buying a business can be extremely tricky and you should get expert advice before proceeding.
See Also:
- What Is Factoring Accounts Receivable?
- What are High Yield Bonds?
- Natural Disasters That Have Created Investment Opportunities
- Insurance Tips for Small Businesses
- Learning from Past Mistakes like Groupthink
Recommended by Amazon:
- The Educated Franchisee: The How-To Book for Choosing a Winning Franchise
- Franchising For Dummies
- The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses
- The Start-up of You: Adapt to the Future, Invest in Yourself, and Transform Your Career
- Start Your Own Business, Fifth Edition: The Only Start-Up Book You’ll Ever Need
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