Many experts agree that the safest way to get into business for yourself is to buy a business rather than start a business from scratch. That’s both true and false.

It’s true in that a business start up tends to have a high failure rate. However, remember that most new businesses are poorly planned and prepared for. Make sure your business and ideas are well thought out.

You give yourself a better than average chance of success when you go through a proper planning process and surround yourself with capable advisors. You should do that whether you buy a business or start from scratch.

It’s false to the extent that you decide to start small, perhaps even part-time and work your way up. You need to start a business that lends itself to this model. If you do, then this can work well as you avoid paying the potentially large upfront purchase price.

Few can afford to pay cash for a business and thus take on debt to start. Debt is never a good thing. That bears repeating – debt is NEVER a good thing.

Debt means that even after covering all your costs of operations you still have to make payments on that debt before paying yourself. This increases your risk and the possibility that a downturn in your markets puts you out of business.

Always remember that debt cuts your options down significantly and will make you a slave to your lender. You wanted to leave the world of the wage slave … great idea … but don’t enter into the world of the debt slave. It’s not any better, it’s worse.

In the right situation, buying an existing business can make a lot of sense. A well established small business in a good market, purchased at a fair price, can be a good way to go. Don’t buy potential alone. The business must have proven results. To determine whether a business is a fair deal for you will require a review of its financial records.

I typically like to see five years tax returns and do an interview of the management team. Your best bet is to have a business valuation done by a qualified professional, a Certified Valuation Analyst (CVA).

Before incurring that cost you or you and your CPA could review the financial information to see if there is even a likelihood that it may work before engaging a valuation professional. Small businesses that have been around five or more years have a low failure rate. Economic conditions can throw a wrench into that though. Be sure to take into account how the business will do in any given economic situation or crisis.

Some last thoughts on buying a business. To buy another owner’s business and ideas puts you on the defensive, which isn’t always a great thing. You will find that you acquired your seller’s customers, employees, and culture. Why is that so bad?

You will have to rid yourself of the bad, nonprofitable, or late paying customers. You will have to rid yourself of bad, low character, and under performing employees. And you will need to change the culture of the business from the prior owner’s to one with your unique imprint. My experience is that this can take three or more years and it’s not a lot of fun.

The many times I’ve gone down this road I really questioned whether it would have been easier to start a business from scratch. When you evaluate the business try to evaluate how many bad customers and employees you see and what kind of culture exists. The financial numbers aren’t enough, you will be running this business and it will take your time to change it.

 

by Steven Schlagel – June 21, 2009