When you buy a business, the great thing is that you have the financials, you can see how much money they’re making, how that breakdown is, what are the different revenue sources, what’s recurring revenue, what are one-off customer relationships, and what expenses, you could potentially lower as the new owner, there are a lot of benefits in terms of the information you have for that currently operating business.
And then you can really de-risk a lot of the chances of having continued business success based on there’s a business that’s had some customers for 510-15 years, those customers drop off at 5%. And you can do those calculations and really understand what’s the risk of this business? How can I expand upon this business, and you have that data?
Now on the cons, that information received could be false. They could be overstimulating their sales information, they could be having a lot of employees that maybe are getting paid cash. And you only find that out during the final due diligence. A lot of people are running businesses not in a professional manner throughout the United States. And that’s especially true for businesses for sale under $500,000. Where as opposed to being sold on a multiple of EBITda, essentially net profit, they will be sold on owners compensation.
What’s the owner making in salary dividends, is the owner’s wife getting money from the business owner, the health care insurance, that that helps the owners family, you know, the company car, there can be a lot of different expenses that are not going to be run through professionally managed business.
But a business for sale and especially in the less than $500,000 range, you’re going to have to do a lot of work with an accountant to really understand how much is the owner making at the end of the day. And then also, with buying a business, they can be pretty expensive.
Depending on the business, it can be anywhere from two to four to five times the owners compensation to give you perspective, for a few different industries like real estate, property management, insurance, accounting businesses that have a stable book of clients that you’re just expanding upon.
They don’t even trade on a multiple of owners compensation or ebit.net profit, they’re trading on a multiple revenues. It could be one to 1.5 times revenue, that it’s going to cost you to buy that existing business cut.
One huge benefit though, right now Small Business Administration loans, SBA loans, are at some of the lowest rates ever been 5%. And you can finance a business acquisition over a five-year period over a five to 10 year period, and you’re paying a 5% interest rate.
And with a business acquisition, as opposed to a franchise, you can fund it with as little as 15% cash down. For a business that is a million dollars, you put $150,000 down on an $850,000 government loan, and if you’re a green card holder or a US citizen, you are eligible for the SBA loan program.
With a franchise of that same million dollar franchise if you’re opening up from zero and it’s already operational, generally you’re going to have to put 30% down so you’re gonna have to invest $300,000 and get a $700,000 loan Scylla 5% but you’re gonna have to invest double the amount of cash if you’re going to go the franchise route for financing and that’s again with a new franchise not buying over an existing buying an existing franchise.
Some of the cons you know, for the last con i can think of for buying an existing business. Usually the owners want to sell for a reason. It could be they want to retire, they’re moving. Regardless, they’re probably not going to stay on so long for seller sellers training. The business seller isn’t going to be Wanting to save for much more than six months, and even six months is a big ask.
For buying a franchise there’s a lot of benefits in terms of, there’s the historics, not just for that one location. But for hundreds, if not 1000s, of franchise locations, they’ve made a lot of mistakes, they’re constantly trying to re improve the business model.
And it can be a lot more scalable than an existing business, where you might be really tied to one location, and you’re really not sure how it’s going to be opening up a second location where franchise, there’s been other 100 500,000 people that have already opened that second location already open that third location, and know how to scale up with having a regional manager and the playbooks there, you got to follow the playbook, and you should be successful in the right franchise system.
A lot of initial and ongoing support from the franchisor makes it quite attractive to go the franchise route. And there are a lot of cons though, you know, there are costs associated with opening it franchise fees can vary, but we see anywhere from 20 to 50,000.
Plus, to have the franchise agreement where for a 10 year period, you have the exclusive brands often brand rights oftentimes or territory, training for yourself or your manager, and all these other pros that go with having a franchise but they go at the cost. And then also there’s the ongoing fees, which can really range four or 5%, up to 15%. Depending on if it’s like an accounting franchise, which is actually doing a lot of the bookkeeping for you and you’re more focused on sales and client service.
Cons and others you know the time it takes to open up the business. With buying that existing business, hopefully you’re right by the right business, and you hired an accountant and did a very good due diligence, you know that you should be making cash from day one. And you don’t have to worry about when you’re going to break even but it’s basically once you take over the business, you can take out dividends or maybe wait a few months and start taking dividends out from the business.
For a franchise it could take one six months, 12 months even more to make that break even point where you can start bringing money out of the business. And then there can be a lot of restrictions imposed by the franchise or depending on the type of franchise system. Like if it’s an education franchise, they’re not going to want you teaching English and a science and math education focus franchise for example. Or if it’s a coffee franchise, they don’t want you selling tea, maybe or selling your grandmother’s cookies that you love and you always dreamed about selling that product to consumers.
Buying a business can be amazing if you find the right business but according to Harvard Business Review, it takes one to two years to find a business to buy. And according to a podcast from Harvard Business Review, it’s a full time job. 12 hours 14 hours are not uncommon for those serious business buyers to allocate a lot of your time to find that right business to acquire. With a franchise you have a lot more ease.
With a franchise it can happen a lot sooner, it could happen in three months for you to identify the right franchise, sign the franchise agreement and start the process of opening the location. But on the cons side, it can take one month, three months, 12 months to open that franchise.
There are pros and cons to both going the franchise route or buying an existing business for sale.
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