Our borrowers often ask us, “Is it better to buy an established business or start up a business?” It’s a reasonable question for those looking to exit their current employment or invest in a business for another income stream. While it may make sense in specific industries to start a business, the benefits of purchasing an established business, along with the security it provides to a new business owner, make a strong case for searching for a company to acquire.
Established companies typically have the following positive attributes:
- Existing customer base
- Established supplier channels
- Brand recognition
- Established market share
- Sustainable and predictable cash flow
- Employees that generally transfer with the sale
- Established reputation
- Seller consulting period (up to 12 months post-closing)
- Ability to start earning an owner’s salary from day one
In addition to the above benefits, if financing is needed, a lender will typically be willing to lend more for a borrower to acquire an established business than to start up a business, typically at a more favorable interest rate. The SBA allows a lender to finance up to 90% of total project costs to acquire a business. While SBA policy also allows 90% financing on start-ups, most lenders will require more equity from the borrower ranging from 20% to sometimes 30% of the project costs. Additionally, some lenders shy away from financing start-ups altogether, so your lender pool will be much smaller when seeking start-up financing.
There are resources available to search for listings, one of the largest being BizBuySell. Engaging the help of a business broker in the market you wish to purchase a business is also helpful. A reputable broker or M&A advisor will often have access to off-market listings and a good pulse on available inventory on the market. Buyers should prepare to provide a list of their search criteria, including but not limited to industry type, revenue size, EBITDA, location, sale price, etc.
If you are considering purchasing a business, it is never too soon to start building your team of trusted advisors and lenders. A deal team should ideally consist of the following:
- M&A advisor/broker
- CPA for financial due diligence and structuring of legal entities for tax purposes
- Banker, if financing is needed
- An attorney with business acquisition experience
Lastly, if you purchase a business and utilize bank financing, the bank will engage a third-party valuation firm to confirm the company’s value. A valuation will assist you with determining if your offer price is reasonable or needs to be renegotiated.