Yes, it’s a huge decision—but when you pull the trigger on buying an existing business, you get the opportunity to become an entrepreneur without starting completely from scratch. And lots of people consider purchasing an existing business each year, so you certainly shouldn’t feel like you’re thinking about something totally out of left field!
Every year, more than 500,000 businesses change hands, and that number is expected to skyrocket in the next several years as millions of baby boomers begin retiring and selling their businesses.
Purchasing an existing business is so popular because it lets you skip past some of the pain points and costs of launching a brand-new company. But the journey from finding a business for sale to closing the deal can be long and complicated.
Before you begin this journey, find out everything you need to know to avoid buyer’s remorse, from understanding the pros and cons of buying a business when you’re still just thinking about the idea, to closing the deal and getting the keys.
Reasons to Buy an Existing Business
Purchasing an existing business is kind of like being on the market for a home. While some people like the history and character that come with an older home, others don’t want the baggage that can saddle an older home and prefer something turnkey. Similarly, there are plenty of advantages to buying a business that’s already been around for a while, but there are drawbacks as well.
Buying an Existing Business: The Pros
1. Proven Business Concept
When launching a brand-new business, a bulk of your time will be spent on the planning phase. You’ll have to write a business plan and figure out how to turn that plan into a reality.
But with an existing business, you’ll typically already have all of this in place:
- A building or office space
- Inventory and equipment
- An established brand and brand identity (whether or not you want to change it, people know it)
- Customer base
- Vendor and supplier base, plus manufacturing resources
- Existing employees who can share their knowledge and expertise
- Management processes and policies
- An understanding of your competition and market
Granted, each of these things may not be in great condition, and the business might not be turning a profit yet. (That part is really important!) However, an existing business has some structure that will save you time up front, letting you quickly see what you need to zero in on. Particularly if you’re testing a new market or entering an industry that you don’t have much experience in, zipping past the difficult startup phase can be a huge advantage.
2. Lower Operating Costs
One of the major draws of buying an existing business is that the operating costs are lower. For example, startup costs for a brand-new restaurant can run upward of $450,000 for initial supplies, food and beverage, signage, and a customized build out of the kitchen. With an existing business, your initial operating costs are lower because—unless your acquisition is pretty atypical—many parts of the business are already in place and ready to go once you’re at the helm.
You don’t need to spend as much of your budget on hiring employees, developing marketing strategies, or building a customer base because those come with the transaction. Instead, you can pour more cash into expanding the business and adapting it to your vision.
3. Easier to Obtain Financing
While buying a business isn’t always a safe bet, lenders and investors see it as lower risk than launching a new company. This is because there’s a history of financial performance that a lender or investor can use to gauge how the business has performed to date and to predict future performance. Plus, like we mentioned, there’s also existing data around the company’s market position, competitors, brand recognition, and customer base.
All this makes investors more likely to invest in the business and can make lenders more comfortable in giving you a business loan. The current owners can even participate in financing the transfer of ownership by giving you a loan (more to come on this in a bit).
4. Intellectual Property on the Table
If your business-to-be has patented their products or has a copyrighted slogan or trademarked logo that wins over customers, then that intellectual property value will probably transfer over to you.
This isn’t on the table with every business acquisition, but it could be critical if you’re dealing with something that you think could be expanded even more. What if you turned this small business into a national franchise? All of a sudden, that patent and copyright becomes a lot more valuable. Patents, copyrights, and trademarks are often included in sales of software companies, tech businesses, and creative businesses (e.g. music, design, and art).
Buying an Existing Business: The Cons
What goes up must come down, right? Now for the drawbacks of buying an established business:
1. Higher Upfront Purchasing Costs
By buying an existing business, you’ll be able to save money on operating costs, such as inventory and equipment. However, you’ll probably face some pretty sizable purchasing costs. In fact, those purchasing costs might very well be greater than what it would take you to start the business.
That’s because, in addition to the obvious assets, you’re also buying ownership over the following:
- Customer base
- Built-out brand
- Design work, from logo to store interior
- Business concept and plan
- Time, effort, and money spent testing out products
- Refined processes, procedures, and policies
- Income stream (if the business is already profitable)
- Assets and equipment
- Intellectual property, such as copyrights, patents, and trademarks
- And more!
All of these items will be the subject of negotiations between the buyer and seller and factor into the final purchase price.
2. Unfamiliarity
If you’re buying an existing business, you’ll necessarily be a bit less familiar with its inner workings and the details of its products, processes, employees, and financials. This could be a bit of an obstacle, especially when you’re just starting out. This is especially true if you are entering an industry that you lack experience in. You’ll need to spend a lot of time learning the ropes, and prepare for the learning curve to be steep.
3. Risk of a Hidden Problem
Ever watch a show where the second a buyer closes on a house, they find out the inspector missed a massive crack in the foundation? Too late to go back on that purchase now!
Well, as a prospective business buyer, you’ll also go through a fairly intensive due diligence process, where you’ll gather information about the business and the current owner. But no matter how much information you uncover, you always run the risk of taking on an issue that you’re not aware of or that’s worse than it appeared. For example, equipment could be damaged, or the brand might have a bad reputation. A bit later, we’ll tell you how to catch most of these problems before it’s too late.