Buying a Business is a Smart Move
Surprisingly, in spite of the recession in the US, starting up a company is still proving to be big business. Recent figures in BusinessWeek.com confirm that last year, a staggering 12% of US adults started up their own business; either from scratch, or by buying an existing business or franchise; a significant and dramatic rise from the percentages of previous years.
The trend is also replicated in other countries in recession; such as the UK; and the GEM (Global Entrepreneurship Monitor) suggests that overall, 400 million individuals worldwide are involved in entrepreneurial activity. So what is it exactly that is driving people to invest time and money into developing a start-up business, in spite of the current financial climate? Why are more and more people looking to purchase existing businesses and franchises? And, perhaps more pertinently, how are these entrepreneurs managing to source the funds to purchase or develop a business?
The Appeal of Being an Entrepreneur
At the start of the recession in both the US and other countries; the predictions from the experts was that entrepreneurial activity would decrease, rather than increase. Initially, this was indeed the case. However, a recent boom in numbers of people starting or buying an existing business has led experts to re-evaluate the statistics.
For many individuals, starting a business may well have been an act of necessity after losing an existing job. However, statistics show that an equally popular reason has been the desire to have complete ownership and control of the business and to have freedom and flexibility in the workplace. What options are available to entrepreneurs who want to break from their existing careers and ‘go it alone’? And which option is most viable in the current national economic situation?
The Advantages of Buying an Existing Business or Franchise
Whilst starting a company from scratch can seem tempting; in the current financial climate, it is also undoubtedly the more high risk option.
The significant costs of developing a product and service, not to mention undertaking market research, developing marketing materials and promoting the business, can prove to be the downfall of many a start-up company. Indeed, according to Harvard’s senior lecturer, Shikhar Ghosh, around 75% of start-up businesses fail, and these figures are replicated in other Western countries, such as the UK.
On average, 50% of start-up companies still fail within the first year, and financial issues are generally cited as the predominant reason. However, purchasing an existing business or franchise can offer an attractive alternative. Though the initial outlay can be higher, the risks are significantly lower, as an existing business will have the benefits of a customer base, a level of brand awareness and many other aspects in place, including stock, systems and materials.
There is often a significant decrease in the amount of initial work involved to get the business in a profitable state. Of course, for some, the appeal of owning a business is the creative element; and the thrill of developing a product or service from scratch; but for those looking for a more reliable ROI, purchasing an existing business or franchise may well be a more appealing option.
Buying a Business: The Finances
It is important to be aware, when planning to purchase a business or franchise that the initial financial outlay is likely to be greater than for starting from scratch. However, ROI should occur more quickly, due to the benefits of an existing customer base and a brand reputation already in place.
For individuals looking to buy a company, but concerned about raising the finances to do so; there are a number of options available to help you along the way. Many US entrepreneurs are following the lead of UK companies, and making the bank manager their new best friend.
There are a number of loans available for people looking to start a business; and the excellent news for those looking to invest in the purchase of an existing company is that banks are often far happier to assist with the purchase of an established company than offering to help with a start-up operation, which of course, is unproven. It is important to shop around for the best loan to suit your requirements. As UK site Money.co.uk state, ‘making sure that it offers both flexibility and value for money’ is of vital importance and can be the difference between success and failure of your venture.
The site also highlights that there are other options available to entrepreneurs, including peer to peer lending, which are arranged independently of the bank. Make sure to produce an extensive forecast of projected profits; not just for the benefit of the bank, but for your own benefit too. For those buying a business as opposed to starting from scratch, this is a far easier process, as the figures from previous years are readily available. Consider investing in the help of a broker too; who can help with pre-screening businesses for you and also with negotiating the sale.
Take the Risk, but Make it a Calculated One
Ultimately, any investment in business, whether for an existing business or for a new venture, is a risk. The important thing is to understand the risks and to plan accordingly. It is worth making preparations for all eventualities.
If the company for any reason fails to thrive; what steps will you have in place, to ensure that you can rescue the company as best as possible, and more importantly, maintain a standard of living for yourself and your family? Remember that there are more costs involved than simply paying the money for the company itself. You will also need to plan for solicitor’s fees, accountant fees, plus any additional stock and materials that you may need to invest in. If in doubt, talk to a professional financial adviser about the risks involved and the total costs. However, be assured that with appropriate planning and awareness of the costs involved, investing in a business or franchise can be a highly profitable venture; and of course, the advantages of owning your own company and being your own boss are priceless.
This article is a guest contribution from Melissa Barry.