Buying an Existing Business: Part 1
Part 1 of this article will address why a person should consider buying an existing business. Part 2 of this article will address what a purchaser should consider when buying an existing business and Part 3 will address the legal impact of buying an existing business.
Why consider buying an existing business?
Many people dream about owning their own business and becoming their own boss. Many people believe that their dream is only possible through a start-up business. While establishing a new business or company is an option, it may actually be more risky than purchasing an established business that is for sale. Why not purchase a business with a proven concept, existing sales, and an established customer base?
Many of the pitfalls entrepreneurs and new business owners are challenged with relate to the finances of their businesses. In fact, 50% of businesses fail within the first 5 years.1 Of course, a business owner that has a well-planned business can be very successful. Our community, Gainesville and North Central Florida, have many examples of successful small business ventures.
Moreover, you may have a great idea or concept, but the upfront costs of actually starting the business may be too prohibitive. For instance, you will want to protect your new business from liability and therefore you will need to hire a competent business law attorney to establish your business as a LLC or other business entity. Further, you may have the upfront expense of purchasing inventory or equipment for the business. Before you know it, the business is in debt before it even earns any revenue.
Sometimes purchasing an existing business may be the most sensible solution. It also may be less risky, but this is not always the case. Of course, the market dictates what, if any, opportunities actually exist. An established business may provide the following benefits:
• Goodwill (loyal customers, quality product offering)
• Established profit and revenue streams
• Necessary equipment (prior owner has already purchased)
• Known brand
• Property (owned or favorable lease terms)
• Location
• Permits and licenses (i.e., liquor and/or food license)
• Training (generally, the prior owner will provide on-site training)
A new owner of a business can still make major changes to the existing business. For example, you may buy a pizza restaurant that is centrally located, established, and has strong sales, but only offers pizza. You may decide to increase its offerings, to say, calzones and subs, in order to increase the business’s profitability and its customer base. Alternatively, you may update a tired logo by trademarking a new one.
Ultimately, a purchaser must still do his or her due diligence before purchasing any business (see Part 2). This includes determining why the business is for sale in the first place. Is a business owner selling his family-owned seafood restaurant because Red Lobster has moved in across the street or is the business owner retiring? Furthermore, an existing business likely has a more costly price tag. However, financing the purchase of an existing business is generally easier because of its track record of success. Whether you are considering buying an existing business or starting a new one, the Office of Knellinger & Associates can help you with this process.
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1. U.S. Small Business Administration, Small Business Facts Advocacy, available at https://www.sba.gov/sites/default/files/Business-Survival.pdf.
Knellinger & Associates | 2815 NW 13th Street #305 | Gainesville, FL 32609 | (352) 373-3334