Business

Don’s Diatribe: Lowering the risk

We all know that starting a business can be a risky affair.

The Small Business Administration says that more than 50 percent of small businesses go under within the first five years of operation. Failure is a fact of business. If entrepreneurship weren’t so perilous, everyone would be doing it, right? Even with all the money, planning, and enthusiasm one can muster, there’s simply no way to eliminate all the risk of starting a business. You can, however, lower some of that risk by buying an existing business.

Each year, thousands of small businesses change hands. Many purchase an existing business for the same reasons people purchase an already-built home instead of building a new one. That is, because building a home or a business takes a lot of time and work, with lots of potential for problems along the way. Besides time and energy, an advantage to buying an existing business is that the failure rate is about half that of starting a new one. Here are some other advantages to buying an existing business:

1. Reduced startup hassles and headaches. Many important tasks have already been done for you like finding customers, hiring employees, locating a space and incorporating. You also may find it easier to enter a market with a business name that the public already recognizes. This doesn’t mean, however, that you should shy away from preparing business and marketing plans!

2. Less Risk. If the business has a good operating history and a product or service with a demonstrated market, some of the risk is removed. Just remember that no investment is a sure thing.

3. Established cash flow. With a new business, estimating financial data is fraught with the potential for wide margins of error. Looking at historical financial data helps you make more accurate financial forecasts. For a lot of entrepreneurs, it can be reassuring to have an existing, reasonably predictable cash flow.

4. Easier time securing capital from lenders. Less than 10 percent of startup businesses are able to successfully secure required financing. Many lenders will fund 50-75 percent of the acquisition cost for an existing business if it has a positive cashflow, proven track record and perceived stability. An existing business also has assets that can be used as collateral.

5. Established relationships. An existing business, if it has been operated properly, should have an established client base so you don’t have to recruit them yourself. It should also have established vendor relationships and properly trained employees in place.

Purchasing an existing business is a great way to lower the risks associated with entrepreneurship. But as with most things in business, nothing is a sure bet. Next time, I’ll examine some of the problems associated with buying an existing business.

Donald R. Simon, J.D./LL.M., is president and CEO of Simon Business Consulting, Inc., a firm providing consulting services such as business and marketing plan development, media representation, and presentations on the basics of starting a small business.  Send questions or comments to don@simonbizconsulting.com. This blog is provided as a source of information and is not to be construed as legal advice or opinion, or to form an attorney-client relationship.  For legal advice, please consult an attorney.