Pros & Cons of Buying an Existing Business

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The pros of buying an existing business include positive cash flow, an established client base and an established brand. Cons for buying an established business include the potential for old equipment and potentially having to fire a number of employees. Weigh the pros and cons of buying a business with advice from a small business owner in this free video on buying a business.

Part of the Video Series: Small Business Basics
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Video Transcript

Hi, my name is Justyn, with Justyn Paul Management, and today, I'm going to be talking with you about the pros and cons of buying an existing business. Purchasing an existing business, can definitely give you a great deal of acceleration. You can get through those first four or five years of starting up a business, much more quickly, if the business is already established. Some of the primary pros can also be the cons, though, but the big pros I look for, are examples of cash flow. If you've already got a business that is producing cash, is it financially stable? Is it making money? Ideally, you're going to be buying it as something that is working, although you can get a great deal, by purchasing a company that just needs better management, that may be losing money, and you can step in, and quickly either hedge up the funds, and give it some capital to work with, or just clean up the management, and get it producing money very quickly. Some of the other things that buying an existing business, some of the good parts of it, are that you already have an existing client base. Hopefully, there is already an established brand, you're not having to start from scratch, with branding. You're going to also have equipment that works, hopefully. They already know exactly what they need. It's going to be very important for example, say you're purchasing a car, an auto shop. Now, one of the main things you're going to want to see in an auto shop, is the actual garage, and all of the tools, and the lifts, and everything else that you need to run a successful shop. You're not going to have to go through an extensive research period, and acquisition period, for all of that equipment, and the raising capital for all of that, can be very, very exhausting, as well. Another very important part of buying an existing business, is that you're already going to have policy that's in place, and policy is ultimately what drives the company, and if they've already got policy in place, you can either step right into what they have, and run with it, or you can adapt and bring in some of your own ideas that have worked. Maybe you can identify those areas of their policy that are weak. Often I have seen in small businesses, where they have great policy, with through a franchise or some other form of getting that policy, but they're not actually using it, and finally, you also have employees, if you're going to be purchasing a company, and that can be huge, because these employees are going to know your clients, they're going to know the software, the hardware, whatever it is this company does. They're already going to have been trained on that, and you can save all of that time, that headache, of trying to bring in new folks. Now again, just like I said earlier, a lot of those pros can also be cons. For example, you could actually have negative cash flow, so yes, the company is established, yes, money is coming in, but it's not profitable. There can also be times where I've seen, where a company looks to be producing positive cash flow on paper, but in the real world it's not, so be careful of that. If you were to buy an existing company, that has all the equipment already, one of the problems can be, that the equipment is very old, it's antiquated, it may be barely functional, and you not realize it, and as you're looking over the company, everything looks great. Six months into the business, everything starts to fall apart. I have seen that happen before, so be very careful if the equipment is old. That can have to do with vehicles, computers, all sorts of things, so just be careful with that one, and of course, just as having employees can help, when you're buying an existing business, they can also hurt you. That can happen because the owner has retained too many employees, for too long, and it's killing your cash flow, and by having to fire a number of employees, let them go, change their terms, you can create a huge morale kick, very bad, where everybody's upset and frustrated, and that can have a very bad effect too, so just as having the employees can be good, they can also be bad, so hopefully, that will give you a couple of ideas to look for. Buying an existing business can be a huge way to accelerate business, especially if you're going to franchise, which is something I'd recommend, and hopefully, that will help you out.


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