Why buy an existing business?

One of my first posts at the New York Times was titled Buying a Business Instead of Starting One. I illustrated the reasons for buying an existing business by telling the story of a business owner named Sam. At the end of the post, Sam is revealed to be none other than Sam Walton — founder of Walmart Stores, Inc. — who bought a Ben Franklin variety store in 1945 and turned it into the world’s largest retailer.

Regardless of the size of your small-business ownership dreams, here are three reasons to buy an existing business rather than start one from scratch.

1. Buy it today, get paid on Friday

If you’ve ever been through the lean years of a start-up, you know how long it can take to begin paying yourself a decent salary. It cab be months or even years before a new venture is able to support not only itself, but the owner and his/her family, as well. Even if you are able to pull out a salary for yourself, there’s still no guarantee that it will be enough to justify all of your hard work. Only time will tell.

When you buy an existing business, you know exactly how much the previous owner has been able to pull out of the business. This can come not only in the form of salary, but may also include perquisites like auto and cell phone expenses, meals, travel and entertainment, charitable contributions and other discretionary expenses. The total amount is commonly referred to as Seller’s Discretionary Earnings (S.D.E.), Owner’s Benefit, or simply Cash Flow.

2. You know the price tag & what’s included

One of the primary reasons that start-ups fail is lack of adequate funding. Put another way, it costs a lot more to get the thing up and running than the founder(s) ever thought. Just because you have a certain amount available to start a business doesn’t mean it will be enough to get it to the point of profitability.

I can’t tell you how many times I’ve met business owners who have started a business that doesn’t meet their expectations, and then want to sell it for the amount they have invested in it. “I just want to get my money out,” they say. Sadly, that’s not how things work. If the business can’t pay you back, chances are a buyer won’t either.

When you buy an existing business, you know exactly how much you’re paying for it, how those payments will be structured (i.e. some at closing and the rest over time) and how long it will take to recoup your initial investment with earnings from the business.

3. You can still put your stamp on it

One of the reasons people are drawn to starting a business is the prospect of making something out of nothing. A friend likes to remind me that business owners tend to be creative, right-brain personality types. Starting a business gives you complete freedom to create not only the product or service you sell, but the brand, the corporate culture and the customer experience.

With that said, there’s no reason an existing business can’t reflect your own style of business ownership. Common wisdom says not change much about a business during the first year after purchase. After that you can begin to make your own improvements, and let the business express your personality and vision for the future.

There are a host of other reasons to buy an existing business versus start one, including reduced risk and greater access to capital. If you dream of owning your own small-business, consider buying one. It worked out pretty good for Mr. Walton.

Do you have any questions or comments about buying a business?

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