Existing Business or Brand New Venture?¹
Entrepreneurs who don’t like the restrictions of a franchise arrangement have two additional options: to purchase an existing freestanding business or to start a new company from scratch.
Each has its advantages and drawbacks. Whatever you decide to do, do not move ahead until you research the subject, talk with business owners who have followed this route, consult an attorney about the legal aspects and speak with your accountant regarding financing.
Many small business owners prefer the independence inherent in a freestanding company. Besides having a ready-made customer base, other benefits may include experienced employees, an established operational infrastructure, and often, a suitable lease arrangement.
One potential drawback relates to the firm’s day-to-day operations. If you plan to change the existing structure, you may face repercussions. Altering corporate policy, firing and hiring staff, and shuffling the management hierarchy can cost clients and customers who don’t like the new look.
If you do decide to purchase an existing business, use the following guidelines:
- Choose an industry with which you are already familiar. Research shows entrepreneurs more likely will succeed in a field that interests them.
- Upon identifying a business you would like to buy, draw up a letter of intent suggesting purchase price, terms and other details. Include a confidentiality agreement, assuring the owner you will not share data you discover during your research unless it pertains directly to the potential transaction.
- Learn all you can about the company before you buy. Visit the business during operational hours, and if possible, strike up conversations with employees and clients to assess their satisfaction levels.
- Review certified financial records such as cash flow statements, balance sheets and accounts payable and receivable. By studying these documents, you can ascertain the income, expenses and profits for each year the business has been in operation. Pay attention to any trends you may find along the way.
- Read through employee files, giving particular notice to turnover rates, disciplinary actions and staff complaints.
- Review all major contracts, consumer complaints and past or active lawsuits.
- Make sure to ask the current owner why he or she is selling the business.
To be thorough in your research, many financial experts suggest enlisting professional help to price and evaluate the company you’re investigating. A number of models exist, chief among them:
- Capitalized earning approach, based on the investment return expected by an investor
- Cash flow method, based on how big a loan the business’ cash flow will support
- Balance sheet method, calculated on a company’s tangible assets
SCORE offers a downloadable fair market value tool on its website if you’d like to tackle a preliminary assessment on your own.
Closing the Deal
It is strongly advisable to hire an attorney before closing the deal on your new business. A lawyer will help you gather and review mandated documentation, draw up lease arrangements and arrange promissory notes, if needed. Other details an attorney may address include:
- Security agreements
- Federal and state-mandated tax and filing forms
- Vehicle transfer documents
- Bill of Sale
- Patents, trademarks and copyrights
- Closing/settlement sheet
- Non-compete covenants and employment agreements
- Bulk sale laws regarding business inventory
For entrepreneurs who like to blaze trails and make their own rules, a start-up company may offer the perfect fit. A word of caution, though while your ideas for a new product or service may be stellar, take the time to put together a business checklist before forging ahead.
At minimum, your checklist should address the following questions:
- What is unique about my business?
- Who and where are my competitors?
- Is there a market for what I’m selling in my area?
- Does my product or service have staying power?
- Does the local workforce have the talent I need to run my company?
- Can I secure enough financial backing to launch my business?
Once you’ve established the basics, continue researching the market to help identify your target audience and ensure that your area can support the company.
The next step is to develop a business plan. While this need not be elaborate, an organized strategy for building your firm is essential. You can always make adjustments as you formulate your ideas.
A basic business plan should:
- Touch on your short and long-term goals for the business
- Incorporate marketing strategies you would like to initiate, such as a timetable and advertising budget
- Include industry-specific research such as trends, financial patterns and potential pitfalls
- Present a general management plan for eventual development into an operations manual
- Include a financial plan with projected expenses and revenues
Since most new businesses fail, your decision either to buy a venture or to grow one should be grounded in reality. Before you quit your day job, make sure you’re in the financial position to move ahead with your entrepreneurial goals. If so, remain positive, patient and tenacious landing the big clients or establishing a large customer base takes time.