Investment advice and financial planning all seems pretty standard if you read financial news and blogs by financial advisors - stocks, bonds, funds, insurance, some alternative investments. If they’re really good they'll talk about taxes and estate planning too. All of those elements are customized to your family's specific situation – how much, when, what type of accounts to keep it in, et cetera. One potential investment that is not often discussed in the context of financial planning or investment strategy is business ownership. Specifically, “Should you buy a small business?”
I am not talking about starting a business. That’s a great vision for a lot of people and an achievable reality for a small number of driven, mostly young-ish entrepreneurs. It is not for everyone. There is a huge part of the small business segment that buys, or buys into an existing business rather than starting one from scratch. Sometimes, you will have better odds of success if you find an existing business in which to invest.
Small businesses go up for sale every day for various reasons. Often the current owner is retiring after decades of work. An owner might also want a partner with cash and new ideas for growth, or just wants some cash out to realize some of the fruits of their labor. Another buy-in opportunity is to get a franchise with an ongoing brand. The kinds of businesses you could buy are innumerable. Whether you should buy a business depends on your needs and expectations.
The first difference between buying a small business and starting one yourself is that you have the opportunity to buy something that is already working. The concept is developed, tested, and proven to work. You can walk into a situation where there is product on the shelves, employees on the clock, and customers waiting to buy. You'll also have access to all of the records and customer data, which can be very valuable.
Stages of a start-up business [Development, Startup, Growth and Establishment, and finally Expansion] can take many years to get through. If you buy an established business, most of these stages have already been completed. In many cases, you can get right to expanding the business. Getting financing for an up and running business will be much easier too. Financing an idea is far riskier and banks don’t like to do it.
Financially, buying a small business can be better too, if you are “of a certain age” and have responsibilities and obligations. A startup business might not make its first sale for a long time after the initial seed has been planted. It might not turn a profit for years. Some businesses will never make a profit. Entrepreneurs often don’t realize that until it’s too late. If you buy an established small business, sales are already happening and you could be cash-flow-positive from day one.
There are advantages to buying a business with a proven track record. There are definitely potential pitfalls as well. You’ll be buying whatever problems the business has already. Bad reviews, debt to vendors, problems with the state sales tax commission… When the sale goes final, all of that is yours. You could spend years rebuilding the business’ reputation or cleaning up some mess or another. You could also find yourself pouring a lot of money into tax issues and/or necessary equipment repairs. Also, buying an active and viable business is expensive. Buying a small business comes along with ready-to-run employees, assets, and customers. You are paying for the time, money, and work the current owners put into it to get it where it is today. They have made their mistakes and now they are offering you something that has already been proven to work. So, you’ll need to figure out what price to pay. Pay too much and it will be difficult to recoup your costs. If the owner is charging too little, it might be a sign that all is not what it seems.
Small Business Valuation can be done a number of ways–-discounted cash flow analysis, asset valuation, sales multiplying, etc. The method you use will depend on your own personal preference. DO NOT make the rookie mistake of thinking revenue equals value. Revenue means nothing if the business isn’t making a profit. If you’re unsure of how to value the business, leave it to a professional. You’re better off getting some outside help than making a costly mistake.
Like any investment or substantial undertaking, it is always best to do your research. You need to go through the books with a fine tooth comb. Investigate the brand’s reputation. Talk to customers, vendors, employees. Maybe bring in a business consultant who can show you the right questions to ask and the right information to go over. It won’t be cheap to hire a consultant to review everything but it will be worth every penny to avoid making a bad investment.
I don’t know if you should buy a small business, but if you have a business management background and if you are smart, driven and determined owning your own business could be extremely rewarding and an important part of your family’s legacy. You might also earn a lot of money.
William S Jiggetts