I consider myself an entrepreneur. In the course of my business career I have started three independent internet marketing businesses. I don’t have any plans to start anymore at the moment, but if the right opportunity arises I will.
The question at that time will be do I buy an existing business or do I start a new one. All three of my current businesses I have started from the ground up. So you know where my favoritism lies. But there is something to be said about buying an existing business.
Starting up a new business takes a lot of your time and energy. Not only are you trying to create products and marketing plans, but you also have to set up the operational and organizational details for the business.
When you buy a business, you can start working immediately and focus on improving and growing the business. You don’t have to devote time to finding an office, buying equipment, getting furniture, setting up payroll or finding useful software programs. The seller has already taken care of all the tedious start-up details and laid the groundwork for you.
Financing can be easier to get for an existing business too. An established business has a track record; they have data that can show a bank that their concept works and is profitable. A bank will be able to look at the historical results for the business. If you are starting a business from scratch you can only present them with projections and what if’s.
In the beginning of starting your own business you’ll spend a lot of time finding customers. You’ll work on advertisements, headlines, sales letters, etc. With the purchase of an existing business, you will also be buying an existing customer base that likely took years to build.
Having an established customer base also gives you immediate cash flow. You don’t have to struggle through a long startup period, putting all you profits back into the business. Most experts say that startups don’t make money for the first three years. My first business made a profit the very first year, but I had to use all the profits to pay off my start up loans and to create new products. I was only able to take a salary and draw out profits in year two.
It’s not all roses though when it comes to buying an established business. Mainly because of money. You’ll most likely have to shell out far more cash to buy a business than you will to start one. And how do you evaluate an existing business to see if it’s a good opportunity? No easy task.
There is no set way to determine if an opportunity is right for you. My evaluations have always included taking a look at how much profit the business makes and where that money is coming from.
You want to know what the key reasons behind the profit are. Does the business get most of its business from one client? That can be a risky operation if you ever lose that client. Find out what the key drivers of profit are for the business and evaluate them. Can you improve these areas? If you lose a key driver of profit within the first few years will you have to close up shop? Its details like these that can be a good predictor for future profits.
It’s also essential to look at a company’s financial records for the past few years. Only having one year’s profit and loss statement isn’t good enough. You need at least two, preferably five years’ worth of numbers to fully evaluate the business opportunity. First, figure out how much pre-tax profit a company made for each of the year’s you have records for. If you are going to work in the business as most people do, then the business should also pay you a fair wage in addition to the profits. Determine what a fair wage for the work would be if you were going to hire someone to do it. Then deduct that number from the profits. Remember to also deduct income taxes from that number. Whatever money is left will be the rate of return on your investment.
For most entrepreneurs buying a business there must be enough profits to pay off the investment within five years. Do a calculation to determine if the leftover yearly profits (after your salary and income tax are taken out) leave you enough cash to pay off the loan within that five year period. If not, then the seller’s price is too high. Of course you’ll need to take other factors into effect, such as inventory levels, real estate, existing debt, and assets, all of which would add or detract value from actual sale price of the business.
If you think buying a business is for you, then check out flippa.com. I check this site out all the time for available internet businesses. Flippa is a marketplace that brings together buyers and sellers for web based businesses. You can bid on existing businesses in a public auction format or make a private sale. Flippa has thousands of businesses you can troll through to find that one business opportunity that is just right for you. I haven’t personally used Flippa yet, but many of my internet marketing colleagues have.
Regards,
Ethan Warrick
