I've been asked by a number of entrepreneurial types whether they should consider buying an existing business rather than creating one on their own.
Their reasoning usually leads to the fact that they don't think they are capable of coming up with an original, sound, business idea.
I don't fault anyone for thinking in those terms. The very high rate of business startup failure may, at least in part, be due to poor business idea choices in the first place.
In most cases, however, I strongly urge the small business candidate to steer clear of buying an existing business. Sometimes that strategy works. But I've seen many, many more cases where it backfires and becomes a losing investment for the buyer. Here's why:
(Think of my list only as a starting point for consideration . . . your circumstances, motivation, and the business opportunity itself will all play a role in your ultimate decision.)
1. Even if the business is currently profitable, it may be that the success is due to the owner and his special skills and talent. When these are separated from the business, there is no guarantee that the profitability will remain. This points to the fact that you need to fully understand how and why the current business is profitable.
2. One of the most important rules of solo business success is that the owner chooses a niche that he has passion for, he has knowledge about and experience in. If you buy a business (and its niche), you must ask yourself if you will have that same passion and knowledge for this subject?
3. If the business for sale is profitable, why is it being sold? Of course, there could be any number of reasons, but you'd better be very comfortable that the business is being described and offered at face value and that there are no hidden drawbacks, problems, or "skeletons in the closet." Make sure also that the business is not "stale" or that the market is not oversold.
4. You might not be aware of the future of the niche or the lasting usefulness of the product. Are there reasons why the business will not be profitable in the near future? Is technology overtaking the business? Is competition too great?
5. How do you know if you are paying what the business is really worth? Valuing a business is a very difficult thing. You can't totally rely on past financial statements, future projections, or current assets and income. Are you paying for blue sky? Could you start a similar business at a reduced cost? If so, what's stopping others from entering this same space?
6. Do you fully understand the competition? Maybe there is a new company in the niche that is steamrolling all of its competitors out of business? Maybe this company is one of them.
7. If the current business is not profitable, but you think you know why it's not and you can fix it . . . be very careful that you're correct in your thinking about why the company is having difficulty. It's been my experience that most failed companies have a number of serious issues - it's rarely just one. Almost never does one negative characteristic or problem take down a good business. Look for multiple challenges and operational snafus before you feel comfortable that you can turn the ship around.
8. Often when a business is purchased, it is done on the word of the owner. He may be overly optimistic in his appraisal of "his baby" and its future. You must get other more objective insights. Talk to his banker, his attorney, his CPA, if he has them. Talk to the local Better Business Bureau, the Chamber of Commerce, and any trade associations in the industry. See if you can find out information or opinions about this particular business. And don't overlook polling the firm's customers - they may be your best insight into the hidden troubles of the company.
Sorry for the analogy, but if I were offered someone else's underwear I would decline to wear it in a heartbeat, even if it was washed a hundred times. It's too personal, too private, too difficult to know where its been and how its been treated. I feel about the same concerning other people's businesses - not that there is an occasional great opportunity out there somewhere.
Of course, your differing opinion is always welcome . . .
