Starting a new business can be an exciting venture but also daunting. In 2019, the United States was home to 30.7 million small businesses, and Canada, 1.14 million, yet only 50% of these businesses with employees survive five years. Rather than taking a risk on something brand new, experts who know recommend buying a business instead.
New York-based entrepreneur Diana Fox came to this decision after years working in ad tech-based startup companies. “The career path felt like something I fell into, not something I chose or loved,” she said. “I wanted to switch careers but it’s hard to figure out what to do.”
After some online digging, Fox realized she didn’t have to launch a startup or reinvent a career, but could use the skills she already had to acquire something existing and operational.
After months of research, she bought Fiuti.com, an SAS business (software as a service) that optimizes Google ad campaigns. There are many benefits to buying an existing business, she said. “The product/market fit is solved for. The customer base is solved for and you’ve already identified that it’s a product that is valuable to a set of customers.”
She considered financing the business, but ultimately did not want to be beholden to investors and found a business in her price point. But for bigger businesses, investors may be an option.
VERIFY THE REVENUE STREAMS
If you are buying a business that has an existing stream of revenue, Stacy Caprio, owner of Her.CEO in Chicago, urges entrepreneurs to, “Verify all revenue claims thoroughly before making a purchase and make sure you have a solid growth strategy in place.”
This way, she said, you can be sure to earn your purchase money back more quickly and be profitable more quickly.
Caprio also decided to buy a business after starting several that just didn’t make her enough revenue. “I thought buying one would give me a peek behind the curtain of what actually makes a business successful and allow me to start growing one that was already working,” she said.
She investigated sites like Flippa, which is where she bought her first business, one focused on strategy and growth that did not involve ecommerce or come with a physical location.
DO YOUR RESEARCH
When it comes to buying a business, research is key, said Steve Bulger, the Mid-Atlantic Regional Administrator for the U.S. Small Business Administration.
“Research will help you understand the business from both a financial standpoint and in the overall landscape,” Bulger said.
In your research, he recommends looking into the following details:
• Licenses and permits you may need from the federal, state and local level.
• Your own lifestyle. Do you have the right schedule for what the business will entail?
• Zoning laws if it’s a brick and mortar business or moving one into a new location.
• The value of the business. Bulger said to look at everything from cash flow to tangible assets, to the value of intangible assets. And if you have an investor, be sure you will be able to provide a return on the investment.
He recommends prospective business buyers hire an attorney who specializes in business law.
The best kind of business to buy, Bulger recommends, may be a franchise business.
“The biggest advantage is having an existing blueprint that includes important factors like an established customer base, known operating expenses, and usually fully trained employees.”
RETIRING BUSINESS OWNERS
Another approach is to seek out business owners who are in the later stages of their career and are looking to retire, said Jack Choros, CMO of SophisticatedInvestor.com.
“[An] elder entrepreneur looking to sell their business and enjoy retirement would love a young person with a passion for the company to take over and continue the legacy of the business owner,” Choros said.
Loan institutions and banks may be more likely to loan the purchase funds to a business that already has a long history of success, Choros said.
Even if it takes a while to earn that money back, his attitude is, “Profits are better than wages.”
Ultimately, whatever strategy an entrepreneur takes, you want to enjoy the work you do, so Fox recommends picking something you’re good at and enjoy.
“At the end of the day, you really have to listen to yourself and go with what feels correct based on your research,” she said.