Business Lifecycle

Five advantages of buying a business

Purchasing a small business rather than starting a new one could help catapult you into ownership.

Published: December 22, 2015
Updated: January 30, 2017

There are different ways to start a business. Buying an existing business is one of them. This could let you leapfrog into the life of an entrepreneur. Here are five advantages you might consider for buying an existing business.

1. Start up faster

If you buy an existing business that has actual customers, products and services, and even some brand recognition, you can avoid a lot of the startup stress and get right to operating the business. The amount of labor and expense in adding staff, setting up back office operations, and implementing processes is enormous. Buying an existing business could let you skip some of those steps.

2. Meet your customers

An existing business worth buying should have an existing customer base that you could meet rather than find. The prior owner's experience with customers can also help you identify opportunities in different or new customer segments, such as targeting an influx of millennials or growing families.

3. Start with developed products and processes

An existing business sells products or services that already exist. Once you buy the business, you can improve the business' offerings and expand into related products or services. But the initial prototyping pain was felt by someone else.

4. Inherit staff

An existing business probably already has staff, which you may inherit with the business. Of course, there is no guarantee the staff will come with the business unless you make employment agreements part of the deal. To get the benefit of the staff, make sure you meet them to get a sense as to whether you can work with them and whether they will stay with new management.

5. The money could flow

If your new business has assets like real estate, equipment, or customer contracts, a bank could loan you money against the security of those assets. You could even buy the business by taking out loans on the business' existing assets. This method of acquiring companies is called a leveraged buyout, and it is the secret weapon of many private equity investors. There are also the US Small Business Administration 7(a) loan programs, which can be used to purchase an existing business if the transaction, business, and ownership structures meet SBA eligibility and loan underwriting requirements. Just be careful not to overburden your newly acquired company with debt.

And yet, cautiously explore your potential business

When you buy an existing business, you don't really know what you're going to get. Someone else launched the business, instilled its early values, and grew it into its current phase.

There are several unknowns. Sellers can withhold information. The financial statements could be fictitious, the product faulty, and the staff inexperienced.

Get a complete look at the business. Test everything. Talk to the customers and staff. Look at the tax returns. Talk to the accountant. Talk to a business lawyer. Test the products. Secret-shop the business. Assuming you like what you see, then you can move on to the next stage of buying the business.