Preparing to Buy a Business: Part 1 of 2
Business ownership is a multi-part path of challenges and seeking the right support at appropriate times. But what about the complexity of the business buying process? Knowing if your clients are prepared to take on the task of running a business is one part of the equation, but there are many nuances of the business acquisition process that, if adequately prepared for, may help your clients set realistic expectations for what’s ahead.
These steps will detail questions to ask, and client characteristics to be aware of, as you help facilitate the preparation to buy a business.
Why Buy an Existing Business?
Buying an established business is a paved path to entrepreneurship, which provides a track record and a set of operations to follow or improve. With so many for sale in the market at any given time, finding one that meets the buyer’s professional goals should be within reach.
Namely, buying a business versus starting one will allow for further refinement and evolution of the operation. Here is a quick recap to show the benefits and characteristics that accompany the purchase of an existing business.
• Creativity: Less of a necessity, as operating skills move to the forefront of importance.
• Initial Capital Required: Though the acquisition cost may be elevated when compared to starting a business, ability to focus on business logistics and take over a business with administrative processes in place will even out the discrepancy by the first year.
• Capital Access: Due to tangibility and existing cash flow records, availability of capital may be more abundant and require less reliance on personal savings.
• Cash Flow: Typically able to grow more quickly as it is pre-existing. Startups typically take 2 years to turn cash flow positive.
• Knowledge: New owners can rely on manuals, employees, and current operations in place to help assist with the learning curve.
• Chance of Success: With 90% of startups failing in the first 3 years, the success rate of an established business investment is better.
• In Summary: Established businesses are a good fit for entrepreneurs who have:
– A strong desire to be their own boss
– Operating skills
– More immediate cash flow needs
Determine Readiness to Purchase
60% of buyers say they want to purchase in one year, but helping a client through the buying funnel can result in a smaller conversion when the serious buyers forge ahead, leaving the perpetual searchers behind.
As we touched on in a previous blog post, readiness to purchase will be a prime indicator of whether they’re going to be a worthwhile client to take on, or if they’re just window shopping. A primed business buyer is motivated and knows the risk involved with becoming their own boss.
Profile your client by each category and ask if they…
– Like secure income? Are happy with income? Not Ready
– Are willing to risk income and desire higher income? Ready
– Like defined schedule? Likes limited work time? Not Ready
– Desires flexible schedule and greater work commitment? Ready
– Have limited cash/savings? Not Ready
– Are willing to invest cash/savings? Ready
Overall Risk Profile
– Prefer low job and low income risk? Not Ready
– Prefer higher job and higher income risk? Ready
While beginning the search phase, you will likely provide your clients with a list of items to prepare or do. This list may include:
• Completing financial statements
• Credit checks
• Copies of all documents needed for loan approval
• Organizational folders for each business that reaches evaluation
After hours of due diligence and finding the business that is right, preparation and organization of documents will be an integral part to easing past the more challenging parts of the search.
Check in later for information on identifying the right business opportunity through selecting the right type, and matching the demands of the business to your client’s strengths.
BizBuySell is the Internet’s largest and most heavily trafficked business for sale marketplace, with more business for sale listings, more unique users, and more search activity than any other service. BizBuySell also has one of the largest databases of sale comparables for recently sold businesses and one of the industry’s leading franchise directories.