Buying an existing successful business is by far one of the fastest, most cost effective, and least risky ways to be in control of your financial future. However, finding the right business can be hard work if this is your first step into the unique world of being an entrepreneur.
Over the next few months we will explore what it takes, what to do, who should be on your internal advisory panel, and what questions one should ask when buying a business. If the thought of buying an existing business excites you but the thought of financial statements, legal verbiage and all that other fun stuff does not, then you are in the right place as this blog is written with you in mind.
One should be aware that there are some considerable advantages of buying an existing business over starting from scratch. To highlight these differences let us first take a look at the real numbers of small businesses that survive and become financially profitable. These numbers, from Statistics Canada, may surprise you however being aware of the facts is the first step to awareness.
In Canada 23% of small businesses that start do not make it to their first birthday. Less than 50% of small businesses make it to their third anniversary and there is more than an 80% drop out rate of businesses that survive the first decade. This leaves us only 20 out of 100 businesses standing at the end of 10 years. The average number of years that a small business survives in Canada is 6 years. Want to know why?
With such a major lack of success in small business ownership we need to understand some of the reasons why more businesses are not successful.
These may include:
- Lack of general management skills. A small business owner may be a great technician yet lack the required skills to run the business.
- Another critical issue is market identification. Did the owner properly and accurately research and identify the market. Is there a market to sell into and if so what is the chance that the companies’ product or service will yield any profits or capture market share?
- Is the business managing its finances properly? Is there an understanding of marketing knowhow in the company? What are the systematic steps and process for identifying and qualifying opportunities?
- Is there a business plan? Is the business plan sufficient or is it poor?
- And finally, does the business have the required working capital to survive?
This last point is of critical importance yet is not a known item for many entrepreneurs until it is too late. To illustrate the concept of working capital lets use the example of buying a new car. This new car is one that you have been thinking of for years. Everything about this new car is right, the colour, the design, the engine is powerful and efficient, and sitting in the car you feel that everything falls into place. However, this car is just outside your price range. Following your expert negotiations you get them down to the penny of what you can afford. Your last penny seals the deal. The keys are handed to you, they are inserted into the ignition and upon turning the key you get the dreaded ding… you are out of gas! With your last penny spent on buying the new car you forgot to put money into the deal for the fuel. This is working capital; the gas in the tank. If you forget to put gas in the tank of the car, no matter how great the car is, it won’t be moving far.
This is one of the reasons why purchasing a business that is already operating, generating cash flow and producing strong earnings can be one of the quickest and most effective ways to running your own company.
On the next post we will highlight some of the significant benefits of purchasing an existing business that is generating a profit.