There are many advantages to buying an existing business, but there are also some cons if the business is not in good shape.
When William Carter and his wife, Katherine, considered buying a business, they were drawn to The Canyon Villa, a boutique bed and breakfast in California’s Paso Robles wine region.
As a chef and hospitality executive, Carter knew he had to do his homework before committing to buy the business. In addition to researching the best small business funding options and establishing a board of advisors to guide them on their journey, they developed key performance indicators to evaluate performance and adapted a guest-centric approach.
“Be prepared to fully commit to your business … both feet in and no dress rehearsal,” Carter said. “You must be passionate about your business: we love what we do.”
As seen in the recent post, Buying an Existing Business: 12 Factors to Consider, knowing what to look for going in is important for any entrepreneur. Here are a few of the pros and cons of buying an existing business.
Pros for Buying an Existing Business
There are a lot of considerable advantages to buying an existing business. Here are a few of the benefits:
- There is an established track record.
- There is usually less of a lead time, if any, before profitability.
- The time and costs of establishing a new business are not an issue.
- The heavy lifting and legwork associated with starting a business is already done.
- There is an existing customer base.
- Business operations are already established (although these can be changed).
- Vendors, suppliers, utilities, and relationships are already in place.
- Employees with knowledge of the business are usually hired and trained.
- The marketplace and competitors are established, and information is known.
- A brand has been established for the goods or services offered.
- Work can focus on expansion and growth, not start-up challenges.
Cons of Buying an Existing Business
While there are decided advantages, depending on the strength of the business and other factors, there are some downsides to consider.
- There will likely be an initial higher cost to purchase, as you are buying all the sweat equity that went into establishing the business in the first place.
- The seller may have an inflated sense as to the value of the business’ worth, resulting in wide variances between valuation and asking price.
- Receivables, equipment, and supplies may be in poor shape, unusable, or uncollectible.
- Employees can resist changes from a new boss or supervisor.
- Problems are inherited that need to be addressed once the purchase is finalized. These problems may relate to poor customer or supplier relations, a bad reputation, or a suboptimal location.
- Changing policies and procedures takes time to develop and implement.
- The business may be identified with the previous owner. Time is needed to make it your own.
Reaching the Dream
In May 2016, Rick McVey purchased Dilly Lily, a 19-year-old upscale flower shop in Chicago. McVey did extensive due diligence before purchasing the business, including hiring an attorney, financial advisor, and consultant to assist in identifying issues that might have arisen.
Since the purchase, his elite client base has grown and now includes Michelle Obama, Tyler Perry, and the Chicago Cubs among its patrons. McVey credits part of his success on retaining two key employees after the sale.
“I believe that it’s always best to hire people who know more than you, and this assembled group really helped get my business moving forward,” McVey said. “Aspects of business ownership that I didn’t think about were covered by the professionals I chose. It’s been money well spent!”
Both McVey and Carter relied on Benetrends for advice and insights on how to finance their small businesses. With Benetrends, small business owners can use existing 401(k) or IRA funds that are rolled over and used for purchases or operations.
Benetrends’ strategy lets entrepreneurs access penalty-free funds faster. To see how the Benetrends model can provide you with the funds to fulfill your business ownership dream, download The Definitive Guide To 401(k)/ROBS Business Funding today.