Buying a Privately Owned Business

There are 4 things you should know before you buy a business

1: Buying vs. starting a business
2: What kind of business to buy
3: What to look for in a business
4: How much money it takes

Buying vs. Starting a Business

When is it better to start a business, and when is it better to buy a business? Most people believe that buying a business is expensive, which is why they choose to start a business instead. This belief, however, is erroneous. Research shows that buying a business is actually cheaper than starting a business, because there are lots of unexpected costs involved with starting a business from the ground up.

What are the advantages of buying a business? Here are a few of them:

• It costs less than starting a business
• You already have a steady stream of customers
• If you buy a profitable business, you get income right away
• You can focus on building the business to the next level
• Less uncertainty, which translates into reduced risks
• Banks will finance buying an existing business, but are unlikely to finance starting a new business

What Kind of Business to Buy

There are thousands of businesses for sale on the market, but which one is right for you?
To begin with, here are some categories of businesses:

• Service businesses
• Retail businesses
• Manufacturing businesses
• Distribution businesses
• Food and restaurant businesses
• Professional practice (health, legal, financial etc.)
• Internet businesses
• Gas stations
• Specialty businesses

When it comes to buying a business, you definitely want to consider your background and interests. However, it is wise to sometimes avoid buying a business that happens to be your hobby, because owners of hobby businesses often make their decisions based on emotions rather than based on sound business practices. Often times, the owners of hobby businesses end up disliking their hobby at the end because their business does not generate the income they desire.

Here is a word on buying franchises. The advantages of buying a franchise include a proven system, recognized brand name, and training and support from the franchisor. However, the franchise royalty fee can sometimes make it difficult for the owner to run the business as an absentee owner operation, because there are not enough profits to hire a full-time manager after paying the franchise royalty fee.

What to Look For When Buying a Business

When you buy a business, it is important to understand the financials. Here are a few items that you want to look at:

• Revenues
• Number of units sold
• Average price of units
• Gross margin and markups
• Profit margin
• Owner’s Discretionary Income
• Number of employees
• How much employees are paid
• Current owner’s advertising methods
• Size of customer base
• How well the customer records are kept
• Any expansion potential
• Position relative to competition
• Location of business

You also want to note any trends that have occurred over the last 3-5 years. This list is by no means extensive, but it gives you a general idea as to how attractive the business is. If you have questions on evaluating various business opportunities, a good business broker can offer some valuable advice.

How Much Money It Takes to Buy a Business

It typically takes 20% down to buy a business. For instance, you can buy a $1,000,000 business with $200,000 down, and obtain a SBA loan for $800,000. How much cash you have determines the size of business you can buy. In addition to the down payment, you may want to have extra cash for operating capital and reserves.

Advantage Commercial Brokers have developed personal relationships with bankers over the years. Having a good personal relationship with the right banker can mean the difference between having a SBA loan approved in several months and having it approved in as fast as 2 weeks.

Next step: Business Buyer Consultation - Get personalized help buying a business.