For anyone who dreams of becoming a business owner, there are two primary options: buy an existing business or start one from scratch. Buying a successful, proven business has some clear benefits over starting from the ground up. These include having an established customer base, brand recognition, employees in place, and a mature infrastructure. In addition, purchasing a business has some direct financial benefits that make getting started even easier.
Easy to Obtain Financing
Buying an established business carries much less risk than starting one, so banks are much more eager to lend money for them, and offer more favorable terms. Existing businesses already have the revenue streams needed to cover expenses, have a reputation within the community and a customer base. Startups have to begin paying their expenses before they even open their doors, and may spend an extended period of time operating out of debt.
If you need financing to purchase an existing company, lenders are typically willing to lend more money at a more favorable interest rate than they would for a startup. The SBA allows lenders to finance up to 90% of the total cost to acquire a business. While they also allow for up to 90% on startups, most lenders will actually require more equity from the borrower, despite the guidelines. Some lenders will not loan money to startups at all.
Some business sellers are highly motivated and want to unload quickly. This could be for various reasons, including divorce, health problems, burn out, or simply looking for a change, among other reasons. Since offering seller financing can be a path to a quicker sale, you may be able to find a seller who is willing to finance your purchase. This can result in fewer up-front investment costs, which could be a huge financial head start for anyone looking to buy.
If a seller isn’t offering financing from the start, it could be negotiated in the terms of the purchase agreement. When agreeing to this, some sellers may want to continue some involvement in the business, just to make sure that it stays successful, and their repayment can be secured. This might be undesirable for some buyers, but for others it can also be an opportunity to gain some additional knowledge about the business before going into it alone.
Financial History to Help with Budgeting
Having a financial history on a business is invaluable. When you know your costs and revenues it makes it so much easier to accurately plan and budget. When starting a new business, it takes some time for you to be able to confidently predict future revenue and set growth goals. Even when you are new to a business, if you have sufficient financial history to work off of, you can make informed decisions about cost cutting and choose to focus on growing more profitable parts of the company.
Cash Flow from the Beginning
When you buy a business that’s already established, you get cash flow from the first day of ownership. This not only saves you a ton of startup time, but also a lot of working capital that would have been spent starting from square one. Having a steady revenue stream from the beginning allows you to invest in improvements, upgrades and future growth. The previous owner has invested in building up efficient process and marketing to bring in new customers that can benefit you as the new owner. When you have a startup you will be more restricted by your budget and probably have to wait a long period of time before you can reinvest in the business.
Investing in an established business can be one of the best ways to start your journey as a successful entrepreneur. While there are many financial benefits to purchasing an existing business, there are also plenty of ways it can go wrong. It is extremely important to do your due diligence with any potential purchase. Hiring a reputable business broker to be an advocate in this process could help ensure that you invest in a successful company that will continue to be profitable for many years to come.
If you are interested in buying an existing business in Fort Myers, Sarasota or Naples, Corporate Investment Business Brokers (CIBB) can help. We have been working with Southwest Florida entrepreneurs to buy and sell businesses for over 35 years. If you require financing, we can work with lenders on your behalf as well. Check out some of our exclusive listings or contact us to discover exciting new opportunities in our area.
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