San Diego has seen a steady stream of young entrepreneurs starting up their own businesses over the last few years. This is in large part attributed to the collapse of the financial markets and the ensuing recession. Professionals in transition and the recently unemployed see starting their own business as an alternative to the continued disappointment they face in a tight job market. An often overlooked alternative is to purchase an already proven business. The idea perhaps gets little consideration. In reality, purchasing an existing business is not that far out of the reach. The option should at least be on the table for anyone thinking about starting a new business. With numerous financing options available, many businesses can be purchased with the same up front capital typically necessary to start a new one.
In general, purchasing an existing business is less risky. It doesn’t matter whether one is purchasing a contracting business or a law firm. An existing business has a proven track record. It has developed a strong customer base and good will in the community; has invaluable systems in place for operations, accounting and employee management; and has reliable and trusted vendors, suppliers and professional advisors. The purchaser takes over an operation that is already generating profits. Of course, the quality of the existing business can vary widely. Ensuring that the business is viable requires an in depth analysis of the company’s history and finances, or what attorneys call “due diligence“. The importance of a “due diligent” examination of a prospective business cannot be overstated, and will be discussed in more detail in a follow up article.
The point of this article is to highlight the benefits of purchasing an existing business and to inform prospective entrepreneurs that the alternative is feasible. It seems that the biggest barrier to entry is an erroneous belief that purchasing a business is too costly. People tend to see the buying and selling of businesses as a game played by large investors. It is not. Individuals motivated to go into business for themselves can and do buy existing companies. They do so by marshalling personal resources, securing investment, securing seller financing, taking out business loans, and/or resorting to other creative financing. In some cases, the purchase of an existing business is entirely financed by the seller.
Purchasing an existing business may not be right for everyone, but it is a viable option for most people who have already chosen to go into business for themselves. Barriers include lack of resources, bad credit ratings and inexperience in the particular business being considered. However, these are the same barriers to starting a new business. Where the motivation exists, entrepreneurs choose to make it happen. If they have limited resources, they turn to specialized lenders like the Small Business Administration. They solve credit problems by seeking investment partners and/or seller financing. They substitute hard work and commitment for lack of experience. If opting to purchase an existing business, be sure to consult with trusted advisers such as your accountant or business attorney before making the leap. In addition, consider working with a broker but be careful about relying on his or her opinion about the valuation of the proposed purchase. In the end, there is no substitute for due diligence. See Considerations When Purchasing a San Diego Business, Part One and Part Two for further information.