The decision-making process of buying a business can be difficult for plenty of potential purchasers. A lot of choices need to be made before even beginning to look at businesses for sale; whether it is weighing whether to start from scratch over buying an established business, becoming a business owner over remaining an employee in the workforce, buying a business over investing in stocks, and/or the overcoming the financial hurdles of purchasing a business. There’s no question the road to acquiring a business can be filled with uncertainty. However, when it comes to making a big decision, one of the oldest (and most useful) tricks in the book is creating a “Risks and Rewards” list- more commonly known as a “Pros and Cons” list. While your reasons for deciding whether or not you want to purchase a business are unique to you, it is important to consider the general risks and rewards that are common with most people’s experiences.
1. Revenue From Day One
Most businesses for sale are revenue positive. Therefore, you will likely not face the same amount of wait time to start seeing money come back to your business as you would if you were to start from scratch. You might even be able to get a profit the day after purchasing the business. If you are looking to earn a steady income from day one, buying a business might be the solution for you.
While you might not be considered the founder of the business you buy, you will also not face the same set of challenges that come with starting a new business. Here are a couple of statistics that make starting a business a much harder venture than you might initially think:
- Only about 50% of small businesses survive for at least 5 years
- Only 40% of small businesses are profitable
- A staggering 82% of businesses fail due to inconsistent or insufficient cash flow
These risks can be mitigated through buying a well-established and enduringly profitable business.
3. An Established Brand With A Consumer Base
One of the most challenging parts of starting a business is creating a brand with an established and committed consumer base. It can take years for new businesses to receive any sort of meaningful traction- especially when placed in a highly competitive market. On the flip side, owners of established businesses have done the legwork of building, maintaining, and growing a brand that has stood the test of time. Therefore, when buying a business, you purchase the right to pick up where the seller left off.
4. Being Your Own Boss
This might seem obvious for any aspiring entrepreneur, but it is important to keep this in mind. Being an entrepreneur means being in charge, deciding how you spend your time and making the big decisions that directly impact your professional (and personal) life. While this might seem daunting for some if you are a person who likes being the leader and making a change, then being an entrepreneur is a great path for you.
5. Great ROI
On average, the return of the stock market for the past 75 years after inflation is around 7%. On the other hand, when purchasing an enduringly profitable business (one that is profitable and exists in a relatively low competition environment), you can expect a return on investment in excess of 25% per annum. If we compare both stock and business investing using the rule of 72, an enduringly profitable business can lead to buyers doubling their money in under 3 years, while stock investing will likely show the same results in over a decade’s time.
For more information on how the stock market compares to buying a business, you can check out our article addressing this topic and more.
6. Support In The Transition
While you might have a limited amount of experience when it comes to owning a business, you will likely receive help from the person who understands the target company best: the previous owner. In most small business transactions, the seller (previous owner) will take on an advisory role for a minimum of 3 to 6 months post-close to help the buyer in the transition process. Unlike starting a new business from scratch, buying an operating business comes with a coach and a playbook which means that you are not going in blind.
7. More Control Over Your Taxation
Most people in the workforce have very little control over the amount of taxes they are required to pay come tax time. As a business owner, however, there are certain tax deductions (also known as "write-offs”) that you can deduct from your taxable income. When done responsibly, this can allow you to pay a smaller tax bill. Of course, the expense has to fit the IRS criteria of a tax deduction.
Being able to control your expenses as a business owner adds flexibility to the ways you spend, earn, and are taxed. Making the most of all your available tax deductions can save you thousands of dollars in tax season and are not always available to those working a 9 to 5. Common examples include: home office expenses, travel, team perks, telephone expenses, etc.
Note: be sure to seek the advice of a CPA for all formal tax planning matters.
As a business buyer, you are, of course, not the founder of the organization. Therefore, a company’s culture, objectives, products or service might not fit properly with your own values. In some cases, the disparity between you and your new business might be big enough for you to not perform as well as you initially thought. Fortunately, through services like Tresle and good business transferring, you will have the time to do proper due diligence work and truly find the right fit. This is the time where you can truly explore the ins and outs of the business you are interested in without any major financial consequences.
To learn more about buyer due diligence, check out this Tresle blog post.
2. Learning at a Faster Pace
While starting a business can be a long process, a lot of learning can take place as the company grows alongside you. However, when buying an existing business, you will be handed the reins of a well-oiled machine on day one and will need to learn the operations as fast as possible to keep the company functional. While you will receive help from the previous owner (mentioned above) in the first couple of months, that training will come and go. Instead of learning by growing, you will have to learn at a business that is in motion and moving fast.
A big drawback of deciding to buy a business is the upfront cost. There is no hiding that buying a business is a big investment that requires a lot of capital and consideration. You might not have enough capital to buy the business you want and that might discourage you from going forward with your search. Fortunately, there are multiple ways for you to get the funding you need to purchase a business. While the price tag might seem big at first, the return on investment can definitely pay off in the long run.
4. Difficulty Expanding
A lot of businesses that are for sale, while they do remain profitable, have most likely stayed stagnant in their growth. This can come from multiple factors like the previous owner not wanting to expand, a niche consumer audience, or simply not having enough time to grow. While you might be tempted to try and expand a business to reach new target markets, it might be much more difficult than initially thought. The branding, location, or reputation of the business might deteriorate it from getting bigger. However, as previously mentioned, profitable businesses in low competition environments can give high returns on investment. Many times businesses are not set up to be high growth companies and are actually better suited to be stable, cash-flowing entities.
5. Handling Employees and Customers after the Transition
A change in leadership can lead to some key employees not showing as much enthusiasm when introduced to a new boss; or worse yet, electing to leave. Furthermore, loyal customers might have a strong connection with the previous owner, making it harder to retain them after an ownership transition. As the new owner, you may get pushback from both employees and customers if you have any plans to make major changes to the business right away. This risk can be mitigated by easing your way into the transition and leveraging the previous owner to shepherd you into your new role. From there, you will establish trust and report with key employees and vendors.
6. Older Technology and Procedures
The owners of the businesses you’re interested in may have subscribed to an “if it ain’t broken, don’t fix it” mindset when it comes to their operations. The need to update and refine certain procedures and assets may have been put on the back burner in the years leading up to their exit. As the new owner, you might find some outdated technology being used that might hinder the business’ likelihood for future advancement. Further, certain internal business procedures like HR, operations management, and accounting might not be as efficient as they could be through the use of modern technology. Therefore, keep in mind that these sorts of things might require structural changes that can definitely be costly. Fortunately, there are ways to mitigate this risk with a thorough due diligence process to ensure that the cost of outdated technology is accounted for in the price you’re willing to pay.
There are countless reasons for somebody to go through with the purchase of a business or not. This list is designed to be a guide in showing some of the common factors that are considered by prospective business buyers. Of course, it is always important to conduct your own research beforehand so that you are ready to take that next step when the right opportunity presents itself.