As business consultants and mergers & acquisition specialists, we are often asked by potential buyers why they should purchase a business instead of starting their own. To help answer questions like those, we’ve created a 6-question tour for business buyers. This is step 2 in the series:
2. Why not start my own business instead of buying an existing company?
Time is money. Buying a business will take more money. If you estimate the cost to buy equipment, rent space, pay staff and yourself, and cover miscellaneous other start-up business expenses, you can see this point. Starting a business will take more time, especially up front, as you research ideas and try various ways to reach operational success. Weigh those costs with the cost of buying a business, and keep in mind the level of uncertainty and length of time when your start-up business is not making any profits.
Government surveys indicate that over 80 percent of new businesses fail for various reasons within three years. When you buy a business, you immediately have income and proven cash flow (as long as the business is not in distress when you buy it). Most likely, you will also buy a trained staff and established relationships with customers, suppliers and other partners. You should know at that point that the business is, or can be, a success. Buying a business removes a lot of the risk that comes along with starting your own business.
2a. How long does it take to buy a business?
The time required to sell a business can range from six to eighteen months. Typically, the time it takes to buy a business will be longer than when you bought a house or piece of commercial real estate. The sale is confidential, so there is limited marketing by nature. Your case could be different. A Seller could sell within a month, or years could pass before finding the right (and willing) Buyer. The Seller’s broker will constantly be sourcing and talking to potential Buyers.
2b. Are there tax benefits to buying a business?
There are ways to garner tax benefits when buying a business. Consult a tax expert to verify what is possible. In many cases, depreciation of fair market value on furniture, fixtures, and equipment happens at a faster rate than real estate. Non-compete clauses and the Value of Training are tax deductible. Finally, most businesses have deductible expenses that add to the owner’s cash flow. Again, always seek the opinion of a qualified tax professional on these issues.
To view the rest of the tour for Business Buyers, click here.
To view the tour for Business Sellers, click here.
If you have additional questions or are considering buying a business, contact us for more info. We’d be happy to answer your questions, point you to additional resources or offer a complimentary consultation.
To your success,
Joseph M. Maas, CFA, CVA, ABAR, CM&AA, CFP®, ChFC, CLU®, MSFS, CCIM
President of Synergetic Finance