By: Jeffrey D. Jones, ASA, CBA, CBI
There are approximately 60,000 new businesses started from scratch in the Houston Metro area every year. Historically, 50% fail the first year and 85% are out of business within five years. No wonder bankers and investors are hesitant to loan or provide equity capital for start-up companies. Most of these failures is due to the owners’ failure to adequately plan. They did not do the proper research to determine if the world was ready for their new venture and/or they failed to understand the amount of working capital it was going to take to launch the venture and survive past the breakeven stage.
For many people, acquiring an existing profitable business is far more likely to be successful than starting from scratch. Each year there are approximately 600 business sale transactions in the Houston Metro area. Over 75% of these transactions result in the continuing successful operations of the businesses. Why is this? The following ten factors explain why.
- Existing profitability – Buying a profitable business means the business is profitable day one rather than as much as three years from scratch. There is profit to pay any debt used to acquire the business as well as provide an immediate reasonable return on the investment.
2. Ease of raising capital – Lenders and investors are more likely to be willing to provide debt capital and/or equity capital when they can see the business has a track record of paying its bills and making a profit. Furthermore, sellers are often a source of financing for a buyer of an existing business.
3. Established location – Many businesses fail to due to being in a poor location. Buying an existing successful business provides assurance the location is a good one.
4. Established employees – Finding and training new employees is always difficult. An existing business will have well-trained and skilled employees already in place.
5. Established customers – Getting new customers is often one of the major problems of any business. But having existing customers who can provide testimony to the quality of your products and services is something you do not get when starting from scratch. When buying an existing business, the recurring customers and clients is what sustains the business over long periods of time. If a successful company were to stop doing any kind of marketing they would continue to do business for some time before it started to go downhill. The established customer base and the resulting profitability is really the major asset that you buy when you buy a successful business. The value of the inventory and equipment is a secondary factor.
6. Proven track record – A company’s existing track record as reflected in the historical P & L’s, tax returns, and other financial records can be very helpful in business planning rather than conjecture associated with start-up ventures.
7. Reduced working capital needs – The need for additional working capital is reduced due to the immediate cash flow being generated by the acquired company. Many start-up companies go out of business even though they may have a good concept because the owners did not adequately plan for the amount of working capital that would be needed to reach the break-even point.
8. Obtaining existing licenses and permits – Often it can be difficult to get the proper licenses and permits needed to operate a business. Buying an existing business that has these in place eliminates the time, cost, and hassle of getting these items.
9. Exiting sources of supply and inventory – Getting suppliers to sell to you for a start-up venture can be difficult when they already have established customers for their products and services. Having these sources of supply and inventory already in place assures a line of proven products and supplier lines of credit.
- In-place furniture, fixtures, equipment, & vehicles – Most every business has some level of need for these items. Having them in-pace and operating saves a great deal of time and money having to locate them, buy them, and installing them.
Buying an existing business can be a much faster and less expensive method for getting into your own business. In last month’s edition, I provided an article on Where to Find Existing Profitable Businesses For Sale.
Jeff Jones is President of Advanced Business Brokers, Inc. and Certified Appraisers, Inc. 10500 Northwest Frwy., Suite 200, Houston, TX 77092, (713) 401-9110, firstname.lastname@example.org www.advanced.com.