Buying an Existing Business: Key Considerations for Entrepreneurs
Embarking on the entrepreneurial journey through the acquisition of an existing business can be a savvy move for those aspiring to become business owners. Buying an existing business offers a range of benefits, from mitigated financial risk to tapping into established performance records. In this article, we’ll explore the crucial factors for entrepreneurs considering this path.
The Advantages of Buying an Existing Business
One of the primary benefits of buying an existing business is its cost-effectiveness and lower risk compared to starting from scratch. You gain access to actual financial records, providing a clear snapshot of the business’s past performance. Additionally, the acquisition grants you valuable copyrights and patents, providing a competitive edge in the market. Furthermore, your innovative ideas can inject fresh energy into a struggling business and steer it in the right direction.
Let’s address a common misconception. When a founder sells a business, it doesn’t necessarily indicate underlying issues. There could be various reasons driving the sale, underscoring the importance of conducting thorough due diligence before making any decisions.
Franchising: More Guidance, Less Control
Franchising operates under a business model where the original business owner (the “franchisor”) sells the rights to their business’s logo, name, and model to an independent entrepreneur (the “franchisee”). This model is commonly employed in industries like restaurants, hotels, and service-oriented businesses.
There are two prevalent forms of franchising:
- Product/Trade Name Franchising: The franchisor retains ownership of the business’s name or trademark and grants the franchisee the right to use it. This type often focuses on supply chain management, with the franchisor typically handling product manufacturing and supply.
- Business Format Franchising: This involves an ongoing relationship between the franchisor and franchisee. It encompasses a comprehensive approach to business management. The franchisor provides services like site selection, training, product supply, marketing strategies, and even assistance in securing funding.
Choosing a franchise grants you the rights to use the name, logo, and products of an established brand. This comes with the added benefits of brand recognition, promotional support, and marketing assistance. However, it also entails adhering to regulations set by the parent brand regarding business operations.
Buying an Existing Business: More Control, Less Guidance
Buying an existing business entails taking over full ownership. The chief advantage is inheriting an established framework, including factors like a loyal customer base, clearly defined operating expenses, and a trained staff. Virtually any type of business can be bought or sold, spanning various industries.
When you acquire an existing business, you assume complete control over its trajectory. However, without a predefined vision, structure, or external guidance, you may face challenges as you determine the optimal way to run operations.
Considerations for Franchising or Buying a Business
While these two business models differ, there are three fundamental steps to help you decide between them:
- Evaluate Your Investment: Scrutinize your financial situation and determine how much you’re willing to invest in purchasing and ultimately managing the business. This will inform which businesses or brands align best with your budget. At Vetted Biz, we’ve meticulously assessed over 7,000 franchises, establishing ourselves as the foremost platform for comprehensive and analytical data on businesses and franchises across the U.S. Don’t hesitate to search for your preferred franchise and delve into its crucial metrics!
- Assess Your Skills and Lifestyle: Be candid about your strengths and experience, as they will help you sift through realistic business ventures. For instance, if you thrive on hands-on support, franchising may be the better fit. Conversely, if you possess extensive business ownership experience, acquiring an existing business could be the way to go.
- Survey the Entire Landscape: Examine the existing infrastructure and gain a comprehensive understanding of everything that accompanies the purchase. Don’t shy away from asking questions about contracts, leases, existing cash flow, and inventory. The more knowledge you have, the better equipped you’ll be to make an informed decision.
Choosing the Right Franchise or Existing Business
As we mentioned above, once you’ve determined whether to franchise or acquire a business, you’ll need to scrutinize each specific opportunity. In short, thorough due diligence is paramount.
Your research should encompass a financial assessment and a comprehensive overview of the business.
For those leaning towards franchising, it’s crucial to:
- Investigate all available reports: Begin by obtaining a Uniform Franchise Offering Circular (UFOC). This document contains crucial information about the franchise’s legal, financial, and personnel history.
- Familiarize yourself with associated rules and regulations: Each franchise operates under unique conditions. Confirm your rights to use the franchise name, trademark, and conduct business in a designated area protected from other franchisees. Determine if you’ll receive training and management support from the franchisor, as well as access to the franchisor’s expertise in marketing and advertising.
- Scrutinize contracts: The contract generally leans in favor of the franchisor. The franchisee typically needs to meet sales targets and purchase equipment, supplies, and inventory. Make sure you grasp all the details before signing.
For those interested in acquiring an existing business, consider:
- Licenses and permits: Obtain any necessary licenses and permits from the current owner, or apply for them independently. Identify federal, state, and local permits and licenses required to operate the business.
- Zoning requirements: Ensure your business complies with all basic zoning laws in your area.
- Environmental considerations: If real property is part of the purchase, it’s crucial to assess environmental regulations in the area.
Business valuation: Various methods exist to determine a fair sale price, including the Capitalized Earning Approach, Excess Earning Method, Cash Flow Method, Tangible Assets (Balance Sheet) Method, and Value of Specific Intangible Assets Method.
Buying an Existing Business: Preparing for the Purchase
Once you’ve identified a franchise or business to acquire, conducting a thorough, objective investigation is imperative.
At this stage, professional assistance is highly advisable. Consider enlisting the expertise of an attorney and an accountant. Franchise tax laws, in particular, can be intricate. A franchise law specialist can help you evaluate the franchise package and navigate tax implications. An accountant can provide insights into the complete costs of acquisition and operation, as well as assist in estimating potential profits.
Considerations for Buying a Franchise
Purchasing a franchise offers the benefit of using an existing business model, which reduces some startup risks. Before signing a franchise contract, research the demand for the product or service you intend to offer. Evaluate the growth potential of the franchise and consider the existing competition in the market. Understand the marketing strategies employed by the brand and assess their viability in your region.
Embarking on the entrepreneurial journey, whether through acquiring an existing business or purchasing a franchise, is a significant decision that requires careful consideration of various factors. Both avenues offer distinct advantages and come with their own set of challenges. In either case, a thorough due diligence process is essential. This involves evaluating your financial situation, assessing your skills and experience, and conducting a comprehensive overview of the business or franchise opportunity.