A commonly held belief is that it is better to start your own small business rather than buy a business already in existence. The reasoning is that entrepreneurs shouldn't incur the extra expense of paying for goodwill. It's also said that buying a small business is merely acquiring someone else's problems.
But in most cases, the best strategy for someone wanting to own his or her own small business is to acquire one that is already well established. Here are five principles to consider when making the decision about how to get into business.
1. Value of immediate income: Even though the entrepreneur starting from scratch will avoid having to pay someone else for "goodwill," there still is the cost of setting up and operating the company with no income to offset expenses. Sometimes it takes a year or so before a new company starts showing a profit. And in the majority of cases, someone buying a business can look forward to collecting income from day one, or shortly thereafter. Customers buying products or services already exist, and the company has the needed products in inventory or the support system ready to provide the services. Remember when making the cost comparison to calculate the revenue lost that is associated with starting a business that doesn't produce income for a while.
2. What's the entrepreneur's time worth? While the DYI entrepreneur is making arrangements with suppliers, deciding on product offerings, and setting up the marketing, service and other functions, the new owner of an ongoing company can focus more on learning the business and developing tactics for boosting revenues and profits. The owner's time is money and it usually is a better use of time to focus on building up what's already there, rather than establishing the relationships and creating the mechanisms so the company can begin to generate income.
Many entrepreneurs prefer to find their own location, negotiate the lease, line up vendors, interview and hire employees and establish the systems and infrastructure needed to operate. But these processes often take more time than anticipated--time that might be better spent making sales and improving efficiency of an established business.
3. Cost of capital equipment: If the kind of business being considered does not require much in the way of a cash investment--a brokerage for example, or if the equipment in an existing purchase candidate is old and out of date, there might be no strong reason to take over someone else's enterprise. Certainly not if it involves buying machinery that doesn't contribute to the business. But if capital assets of the business being considered are involved in the company's success, it's a better deal to buy a business with its used fixtures and equipment priced at the market or under-market rate usually allocated to such assets, rather than incurring the cost of new furniture fixtures, and equipment, along with the expense of installation and set up.
4. Training and consultation: Even investors in a business they know how to operate can benefit by taking over an existing company, if only for the consulting and training they usually can get for from the seller. And this assistance is likely a vital part of a deal, when a buyer is getting into an enterprise for which he or she lacks experience. Why do franchisees who want to expand to more outlets often prefer buying a business from other franchisees rather than create a new business to operate under the franchisor? It's because the seller can provide important insight into handling the customers, exploiting the opportunities for growth and managing the current employees.
5. Financing the business: There are business buyers who resist buying a business because they don't like the idea of working for the seller--that is, having to pay some of their income to the person who sold the business. What they are forgetting is that those payments are possible to make, thanks to the revenue generated by the business. Besides, seller financing usually comes with the best terms available. Starting from scratch often requires a loan from a small business bank, or from a finance company associated with the firm that provides the equipment needed in the business. And that's usually a high-cost loan calling on the borrower to pledge assets in addition to the equipment and fixtures being used in the business.
Yes there are businesses for an entrepreneur to get involved with that are better to start from scratch than to purchase. But those are the exceptions. In most cases, if a person ready for his or her own business evaluates the options using the five ideas presented here, the choice usually will be to buy a business already in existence.
|Helpful Resources To Assist In Selling And Buying California Businesses|
|Brad Steinberg, Business Broker: Laundromat Specialist
PWS is the leading laundromat broker in California. Since 1968 PWS has brokered over 2,500 laundromat sales. With over 90 employees dedicated to the coin laundry industry, PWS has 18 licensed agents, a 3 person in-house finance department, 10 service technicians and a 20 person parts department.
|Shalonda Chappel: Escrow & Bulk Sale Services - Southern California
Escrow services to brokers/agents, sellers, & buyers. Established 43 years. Extraordinary service. Experienced with handling difficult transactions. One stop for all your escrow needs: Bulk sales, lien searches, UCC searches, liquor license transfers, publishing & recording services. 951-808-3972.
|Helen Yoo, New Century Escrow - Escrow Services In Southern California
New Century Escrow, Inc. is a fully licensed & bonded independent escrow company. Over 20 years combined experience in handling bulk escrow transactions. Multi-lingual staff that speaks your language, including Korean, Chinese, Vietnamese. Call Helen Yoo direct at 626-890-1151.
|Diane Boudreau-Tschetter: Escrow & Bulk Sale Services - CA
California Business Escrow, Inc. is a full service independent escrow company serving all of California and has expertise in a wide range of escrows. Our team prides itself on providing an exceptional escrow experience. For more info phone Diane Boudreau-Tschetter at 888-383-3331 or 209-838-1100.
|Janet Carrera: Escrow & Bulk Sale Service - SF Bay Area
Redwood Escrow Services, Inc. is a full service, licensed independent escrow company. We are EAFC Fidelity bonded, fully insured & licensed with the Department of Corporations. Committed to offering our clients the most comprehensive variety of escrow services available. Phone Janet at 510-247-0741.
|Elizabeth McGovern: Escrow Services - San Francisco Bay Area
McGovern Escrow Services, Inc., is a leading independent escrow company. We are a trusted partner with our clients, assisting them through the tangled bulk sale & liquor license transfer process. We provide attentive, quality & innovative customer service. Phone Elizabeth McGovern at 415-735-3645.
|William F. Ziprick, Attorney: Legal Services For Buyers And Sellers
Through creative problem solving, attention to detail, accessibility, & understanding that unnecessary delay is often a deal killer, I work closely with my clients and other professionals to consistently achieve a high rate of closings. Office: 909-255-8353, Cell: 509-951-7230.
|Willard Michlin, CPA, Certified Fraud Examiner, Due Diligence
Willard Michlin, CPA #106752, offers buyers step by step training & assistance in doing Due Diligence Services when they are thinking of making an offer, or are in process of investigating a business purchase. He helps to determine the actual net profit even when there is cash. Call 805-428-2063.
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