|Potential business owners often view buying an existing business as less risky than starting a company from scratch. Turnkey businesses provide an established client base, a recognizable name, and a predictable cash-flow pattern.
But shrewd investors can further reduce their risks by evaluating the following areas before purchasing:
Franchise vs. an independent business
The brand recognition that comes with an established franchise business is a positive. However, many franchises will require investors to go through an approval process and agree to pay franchise fees, which may also include a percentage of quarterly or yearly profits. Review the franchise agreement in detail prior to investing so that you are aware of franchise stipulations regarding brand image, fees, and mandatory upgrades.
Independent business opportunities may offer more flexibility with marketing and branding. Plus, there are no upfront franchise costs to pay, and the year-end profits are yours either to reinvest in the business or to spend as you see fit. A prudent sole proprietor with a strong, well-thought-out marketing plan would be well-suited to this type of investment.
Financials and infrastructure
Business owners should be able to draw a discretionary income from their business. When examining your potential buy, look at whether the discretionary income has gone up or down over a period of years. If the owner’s income is shrinking, you will need to evaluate why: Is it poor management? Has competition increased? Are community demographics or political changes having an impact on the business? It may be possible to turn around a faltering business, but you must be prepared for the potential financial ramifications.
When you purchase a business, certain chattels may be necessary to run the company’s day-to-day operations. For example, a convenience store will require a cash machine, shelving to display products, and refrigeration units to house perishable food items.
It’s important that the seller clearly stipulates which chattels are and are not included as part of the sale of the business, and an inspection may be required to ensure that all included chattels are in good working order prior to your taking possession.
Goodwill is the amount of perceived value assigned to the business due to its community reputation and appeal within its existing customer base. A valuation of goodwill is included in the purchase price. And while a positive community outlook increases the goodwill value, a poor perception of the business in the community could have serious long-term consequences that may take more time than you have to correct.
These can be a big help. Or not. Existing employees likely have the training, experience, and customer rapport required to help smooth the transition. And customers who see the same employees continuing to provide the same level of service may be more open to the change.
On the other hand, existing employees who are resistant to the ownership change may cause problems, both from a public/customer relations perspective and in challenging new processes and procedures designed to improve the operation.