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Machines Buying a Business
Since many experts have predicted that in the next decade a significant percentage of the workforce will be working in a self-employment capacity – a large number of who will be working from home, business ownership is becoming increasingly more important to many people.Starting a business is no easy task, so if you are serious about operating your own business, you might want to consider minimising some of the anguish and pain associated with a new business venture by purchasing an established business.
From a financing perspective, you'll have a much easier time securing venture capital from lenders by taking over an established business – particularly if it’s profitable, than starting one from scratch. Not to mention, you will dramatically minimise the financial risk to yourself and your financiers because the company should have proven revenue and an existing customer base.
Lenders will fund 50% to 75% of the acquisition cost for a business depending on a number of factors, such as the cash flow, assets, and the security available. Compare this to less than 10% of all new businesses (start-ups) that are unable to secure the financing required at the outset. This is due to the high level of risk that new businesses pose to lenders, because every aspect of the business is unproven.
Buying an existing business or an established franchise will dramatically reduce the risk when compared with start-ups, since statistics estimate that 60% of new businesses fail within the first three years. Additionally it takes two years on average for a new business to become profitable. Even comparing start-ups with such other options as home-based businesses or multi level marking opportunities, in most cases, you have more chance of success when you buy an existing business.
Listed below are ten advantages of business acquisition vs. a new business:
1. Much lower risk of failure.
2. Business generates cash flow from day one.
3. Proven business concept and processes.
4. Proven products, services, marketing and sales strategies.
5. Established customer base providing referrals and references.
6. Established suppliers.
7. Trained employees in place.
8. Immediate credibility and perception of success.
9. Seller likely to lend support and may assist with financing.
10. Easier to secure affordable financing to complete the acquisition.
If the business has a positive cash flow, proven record of accomplishment and perceived stability, it makes it easier to secure affordable acquisition funding. However, when starting up a new business, every aspect of the business is unknown. You don't know who your customers will be; you don't know how many employees you will need; you don't even know if the business will succeed and with so many unknown variables, lenders have no choice but to reject the financing request, labelling it as ‘too risky’.
When you buy an established business, the previous owner has worked through all those unknowns. An established business should already have a solid customer base, an experienced management team, with proven processes and systems in place. Even if the company was not profitable in the past, your strengths and expertise may lend themselves perfectly to turning it into a viable company. Additionally the company will have employees who know the business inside out and most importantly, the buyer can have peace of mind knowing that he or she has invested in a business with a much higher likelihood for success.
The biggest challenge to buying a business outright is the initial purchasing cost plus the business transfer costs, consultants, lawyers, accountants, and a valuation. Therefore, the financial costs of acquiring an existing business are usually greater then starting one from scratch. Other possible disadvantages include the time and travel required to research the opportunities available, plus hidden problems associated with the business and its receivables, that were valued at the time of purchase but later turn out to be non-collectable. Additionally, many acquired businesses lose 5-10% of their customer base in the first year after a sale.
Also, remember that for many businesses, ‘restraint of trade’ clauses may be included in the sale contract. These may impose restrictions on the seller to trade in the same vicinity, or even in dealing in the same product or service area for a period of time. Good research, careful planning and following the advice of wise counsel are the keys to avoiding these problems. You can avoid some of the pain associated with new management for the staff, suppliers, and customers by negotiating a reasonable amount of time in transition from the current management. It's often more cost-effective to bring in specific expertise in mergers and acquisitions before the letter-of-intent stage is reached.
In fact many acquisition experts believe that it is important to put your ‘resource team’ together early. That is to seek the advice and guidance of business finance experts, lawyers and certified accountant before you begin your search for an acquisition target. After all, most people are going to do this deal once, so it's essential to do it right and put the best total package together to ensure a successful acquisition and achievement long term.
In order to buy the right business or franchise, you need to do a thorough investigation of its historical performance, its operations, current financial status, the staff and management, competition, the industry and its future potential, this is called due diligence. Once all this analysis has been completed, you will then have to determine how it measures up with your skill, expertise, and leadership. All of which is so much easier to do with an existing business.
While there are no guarantees in business and the risks must always be managed, buying an established business clearly offers significant advantages worth considering if you want to become an entrepreneur, own your own business and be your own boss.
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