Purchasing a business opportunity or an established operation means you are acquiring a going concern or one to be. A business opportunity may mean purchasing a franchise, a licensed idea or a business conceot. You can also purchase an ongoing operation.
An ongoing business is a viable alternative to a business opportunity that may be just giving you a license, an idea and a manual to begin. Starting a new business from scratch or purchasing a franchise, license or or a concept that you are obligated to develop is no easy task.
Hoping for the Best
Starting a new business is a long journey and include many factors beyond the scope of this article. Franchising resolves much of the initial work of a business opportunity but you still need to start the operations, build a customer base and generate cash-flow. You are hoping that the business model you purchase is accepted by the community and will eventually prosper.
An Ongoing Operation as a Business Opportunity
When you purchase a business with clients, generating sales and cash, you are benefiting from second-guessing and solving initial problems with startups and franchises. Cash is king and when you purchase a business, you need not hunt for clients to generate needed cash. No need to invent the wheel, the business is already in motion. The operation already has a track record that allows its long-term viability to be evaluated. Besides the fact that there may be substantial cost needed to purchase, a business already in operation has additional benefits that may amortize the investment sooner than you think.
Pros and Cons of an Ongoing Operation
Key considerations to purchase a business include the following:
- It is easier to assess the value of the going concern than it is to project the costs of a new business.
- It allows you to minimize surprises, the unknown, and you usually have a firm foundation to build on- cash flow, trained employees, proven equipment, customers, suppliers, a brand and/or point, some established business model, information on competitors and the market.
- With the business going, it is easier to obtain financing than a new business, either through the seller and/or the bank. Motivated by the possibility of selling their businesses, it is common for owners to offer partial financing. Likewise, banks are more receptive to lending when the business has a history of generating cash flow.
- Purchasing a business allows you to skip the learning curve associated with designing, executing, and developing the new business plan. This is because the business systems are seen as they are working and the seller – in general – provides training to the acquirer.
- Going-concerns also have their drawbacks and are not necessarily the best fit for some industries. For example, in service businesses, the main asset may be the owner himself (his charisma, his personality), who, when selling, may cause customers to leave with him or seek another alternative.
- There already established business will also require a considerable capital investment. It can also hide serious difficulties with repercussions in the short or long term. Some examples may be a bad reputation with customers or suppliers, negative company culture, employee complaints, supplier lawsuits, financial problems, and poor location.
Critical Considerations
If you are considering to purchase a business, here are 7 critical considerations that Professor Donald Kuratko of Indiana University suggests answering five questions when evaluating the opportunity:
- Why is the business being sold? Many times, the explanation provided by the seller is not entirely correct. Sometimes it entangles inconvenient truths. It is important to ensure that indeed, the business does not have internal problems to address. Suddenly the building is going to be demolished or sold or there will be a change in traffic that will affect customer traffic; or the landlord will not renew the contract or triple the rent; or a strong competitor is destabilizing the business, or there are problems with the product or suppliers, etc., etc.
- What is the physical condition of the business? How much do you have to invest to get it up and running?
- What is the condition of the inventory? Is it well cared for, how, new or obsolete?
- What is the status of the company’s other assets? This includes equipment, lease and service contracts, furniture, software, etc. It is important to know how much more it will cost to adapt the facilities to the necessary level.
- How many employees remain? Who are the key people to run the business, how replaceable are they if they leave? Employees are also a good source of company information. If the buyer doesn’t give you access to interview employees at any point, that may be a red flag.
- What is the competition that the business faces? How many are there, how strong are they, how easy is it to get into that type of business? Remember Groupon with a great business model but easy to copy?
- What does the financial picture of the company look like? Mainly we want to know how profitable the operation is – how much it leaves net and what is the trend (every year it generates more or less, or the trend is unstable); If there are particular situations, can they be corrected?
Purchasing a business has its benefits and drawbacks but if you can find the money, you may be well ahead of the learning curve and business success.