What to consider before purchasing an existing business

Opening your own business is an exciting time. Many people relish in the idea of being their own boss and having a higher level of control in their jobs. These reasons are two of the many to look forward to when enjoying the many benefits that accompany becoming an entrepreneur.

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There are many choices to be made when embarking on the journey of entrepreneurship. When looking to open your own company, the first decision would be to decide between building a business from the ground up or purchasing an existing business. Each option has its pros and cons, and the best thing to do is to examine the drawbacks of each. Buying an existing business poses some unique challenges, and whether or not these are workable for you can help determine if this is the course you should take.

Important factors to consider prior to purchasing an existing business:

Purchasing cost

In many instances, the purchase cost is much higher than beginning a business from scratch. The Small Business Administration points out:

"Purchasing cost may be much higher than the cost of starting a new business because of the initial business concept, customer base, brand and other fundamental work that has already been done."

The more established a business is, the higher its worth is likely to be since a high level of investment has already occurred and the seller is going to want to capitalize on their hard work.

Hidden problems

Like with any "used" purchase, sometimes you do not know what you are getting until you're more closely associated. A business is no exception. Some items may look great on paper, but the realistic situation may paint a very different scenario. Receivables may turn out to be uncollectible, substantial repairs may need to be made or other hefty expenses arise that you didn't exactly count on.

Existing contracts

One of the drawbacks of assimilating an existing business is that you have to take on situations you may not have chosen if you had been the decision maker. If existing contracts are in place, then you'll have to honor those if part of the original legal agreement. In working within the confines of outstanding contracts, you might find yourself having to deal with a vendor or supplier that you would not have chosen to work with or accept stated terms you would never have agreed to.

Staffing issues

Change is hard, and staff may feel anxious about having a new boss, especially if they were happy with the former owner of the business. To them, you will probably initially feel like an outsider. On the other hand, if staff have not been happy with their work situation, then morale could be low and this can be a challenge. On the plus side, it could also be a golden opportunity to turn things around and make improvements that will make employees happier and more enthusiastic about work.

Restricted options

Another disadvantage to purchasing an already established entity is you may have restricted options, at least in the beginning. When purchasing the keys to a business, you may not have the luxury of being able to shape it to your own design; in many ways, you might be locked in, at least tentatively.

Consider risks

While not as risky as a new business, buying a business will entail some level of risk as rarely anything comes with a guarantee. Before sealing the deal, it is important to do research, especially when buying an existing business since you do not know all the ins and outs like you would building from the ground up. Explore the community, local taxes and explore the history of the business. You may not want to buy an established entity that, for instance, has a poor reputation.

One of the most important things you should consider when a business is up for sale is why the owner is selling the company. Are they retiring, investing in a new venture or was selling after a certain period of time part of their original exit strategy? These reasons are plausible and are not an indicator that the business is in trouble. However, if there seems to be no logical reason why the owner is selling, this could be a warning sign that you might be entering significant financial risk.

These reasons are not an indicator that buying an established business is a negative. However, they are important issues to consider and weigh alongside the positives of a particular company you're interested in. As long as you are aware of the problems before making the investment, then you can develop strategies to mitigate these and reap the benefits of the positive reasons to buy an existing business.

Additional source: http://www.careerplanner.com/Career-Articles/Benefits-Of-Owning-Your-Own-Business.cfm