A lot of young people are apprehensive about becoming an entrepreneur because of the financial risks associated with owning a company and the emotional toll it can have on them if they fail. Aspiring entrepreneurs can help mitigate these effects by having strong mentors and a sound financial plan. Finding the right business with good market share, proven cash flow and great staff in place can increase the odds of long-term success. That said, entrepreneurs who buy an existing business statistically have a higher success rate after five years than people who start a new business.
For the past eight years I have worked in economic development. I have met with hundreds of business owners, written countless business plans, conducted extensive market research and provided counsel throughout many start-ups. More recently over the past five years, I have focused on businesses looking to sell and people looking to buy an existing operation. After observing many pain points and successes, here are my top six reasons why entrepreneurs should consider buying an existing business:
The existing owner is often willing to stay on for a period of time to mentor the incoming owner. Starting a business can be overwhelming. An existing owner can help ease some of the burden. Mentoring can take the form of ordering properly for busy seasons, maintaining current customer relationships with a warm handshake introduction and ensuring important documentation such as GST, corporation and deduction filings are done well and on time. If the existing owner is unable to provide mentorship, we recommend buyers join the Futurpreneur Canada mentorship program.
An existing business already has customers and continued cash flow. By comparison, a start-up can take a long time to attract new customers and become cash positive. Buying an existing business can offer greater security over working capital and help you cash flow sooner.
Many existing companies have three or more years of profitable financials which makes it easier to secure financing whether you are going to a traditional bank, government organization or looking for venture capital.
According to the Canadian Federation of Independent Business, the number one barrier to buying a business is financing. We recommend our members talk to Futurpreneur Canada about their collateral-free loan. This is one of the best bridge financing loan products in the country. Even if the current business owner is willing to do some vendor financing, this loan can be used as a down payment. For more information or to apply for the Futurpreneur Canada loan, click here.
“Goodwill” comes from a proven book of business and having a solid marketplace reputation. People are creatures of habit; if they have gone to the same barbershop for 20 years, they will likely continue to return after new ownership. As such, a purchase agreement should always include provisions to transfer ownership of a company’s phone number, website and registered name. A purchase agreement checklist and other information can be found in the SuccessionMatching.com Resource Section.
Only one in ten start-ups make it past the second year and many fail during growth as a company tries to hire more staff. Onboarding can be tricky. Having existing, trained staff in place can dramatically increase the odds of business success.
Already own a business? Acquiring your competition can be a great way to rapidly increase your customer base, market share, resources and equipment. Many companies have strategic expansion inter provincially or internationally during economic changes to specific industries or mass retirement. With only 9% of businesses having formal succession plans, their failure to plan could be your business’ opportunity to expand rapidly.
Written By: Alison Anderson, CEO of SuccessionMatching.com