BY: Jeffrey D. Jones, ASA, CBA, CBI
Part of the American dream is owning your own business, yet only 2% of the adult population own a business, thus 98% remain closet entrepreneurs. Owning your own business is a classic risk/reward concept. There can be great rewards for those who are willing to take the risk and succeed. Once an entrepreneur experiences success, few ever go back to working for someone else. Even those people who try and fail, frequently will try again.
Starting a new business, buying a new franchise, or buying an existing business are the three most common ways people get into business for themselves. Many entrepreneurs find an idea and start from scratch; however, historically 50% fail the first year and over 90% fail or go out of business within five years. This high failure rate is due to unproven concepts, lack of working capital, and/or poor management. Starting your own business is one of the most risky investments you can make.
Alternatively, you can buy a new franchise business. According to the International Franchise Association, franchisees enjoy a 90% success rate when going into business. Reasons for this high success rate include buying into a proven business concept, getting initial and ongoing training, and franchisors accepting only those people who have the money necessary to make the initial investment as well as the needed working capital to develop the businesses. This statistic is somewhat over-stated due to the fact that franchisors only report failures when franchises totally closed and not reopened. When franchisors take over a franchisee or the franchise is sold to a new franchisee, these transactions are not reported as failures. While buying a franchise can greatly reduce the risk of going into business, franchisees are never fully in control. The franchisors tell their franchisee how and when to operate their businesses. Many entrepreneurs do not want that much control in the hands of others.
Acquiring an existing business is a viable method for getting into your own business. Business brokers who handle the sale of businesses report that people buying existing businesses enjoy a 75% success rate. If you buy an existing profitable business and then fail, usually you have only yourself to blame.
Advantages To Acquiring Existing Businesses
The reasons for the high success rate when acquiring existing businesses include:
- Being able to review a company’s historical track record as reflected in P & Ls, tax returns and other financial records provides some assurance that the business has been profitable and avoids the overly optimistic projections usually associated with start ventures.
- The need for additional working capital is reduced due to the immediate cash flow being generated by the acquired company.
- Obtaining skilled employees who are familiar with the business operation and market.
- Having established customers significantly reduces the time it would otherwise take to attract an adequate number of customers to support the overhead of a new operation.
- Obtaining existing licenses and permits can often reduce the time and cost of making applications, gathering information, and conforming to required regulations.
- Sources of capital to purchase existing businesses are more readily available than startup ventures. Banks and other financial institutions prefer to loan money for existing operations that have a proven track record. In some cases, the sellers will provide financing for the buyers.
Buying an existing business can be a wise choice for entrepreneurs who desire to have their own business. A proven track record, skilled employees, established customers and suppliers, and the availability of financing makes buying a profitable business much less scary and risky than other methods for getting into the business.
About The Author
Jeff Jones is nationally recognized as an experienced business appraiser and business broker and has earned senior-level professional designations from national associations representing the appraisal and brokerage industry. He is President of Advanced Business Brokers, a 35-year-old firm headquartered in Houston, Texas. The ABB Website has information on businesses we have for sale at www.advancedbb.com. Jeff can be reached at (713) 401-9110.