Start a business vs buying a business

Far more businesses are started than purchased. There are a number of reasons for this, some good and some bad. And far more start ups fail (about 15 times more) than do established businesses.

Often someone starts a business with very little capital and almost just as often the business fails due to lack of capital. The owner simply runs out of money before the start up gets to the point of positive cash flow. Starting a business with inadequate capital is often caused because virtually no lenders will lend money to a start-up. The reason? Because the start-up doesn’t have a history of profits which would be available to pay back the loan. Pretty simple.

Example someone has $80,000 to start a business and they think it’s enough to get the business started and operate until the business is profitable (more importantly – cash flow positive). So you sink in $80,000 and hope the customers like the product or service. WARNING….. the average time it takes a start-up to achive positive cash flow is about 3 years.

Now let’s look at an existing business purchase. If a buyer has the same $80,000 they can borrow another $250,000 and purchase a business worth approximately $300,000 (Purchase biz for $300k and have additional $30k for working capital – total $330,000)! Why will a lender lend you $250,000 to buy this business? Because it has a proven history of making enough profit to pay the debt!! Not true for a start-up.

A business that sells for $300,000 will likely have a psoitive cash flow of approximately $108,000 per year ($9,000 per month). That $9,000 will need to pay for two things… debt and income for the buyer.

A Small Business Administration loan for the purchase of this business will have a monthly payment of approximately $3,235 ($250,000 loan at 9.5% for 10 years).

The positive cash flow per month that is available to the buyer, in salary, is $5,765 ($9,000 – $3,235 paid to bank to retire the debt).

So you have choices…. you can start your own business from scratch, throw in $80,000 and hope (and pray) that someday you actually have a profit or you can buy a business and have a profit from day one. Looks like an easy choice to me. But be warned – do your due diligence thoroughly before starting or buying a business!!! Where do you go to find businesses for sale? Just google buy a business in (your town here). You’ll see lots of choices. Do your research carefully and thoroughly and you could turn your dream of owning your own business into a reality.

Let me know how things work out…..

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3 Comments

  1. Jess Sednap
    Posted July 15, 2008 at 3:04 pm | Permalink

    Hi, I found your blog on Google.
    I’m looking to purchase an existing business for the very reasons you posted. The only thing is that I’m not sure where to start looking. Any suggestions?

  2. Posted August 8, 2008 at 6:40 pm | Permalink

    Interesting article. I want to buy a business, so this is really helpful. I’ve also been looking at businesses online, but I haven’t found anything that I think is worth it. Do you have any suggestions? Thanks.

  3. Posted August 16, 2008 at 6:28 pm | Permalink

    You could start by looking at http://www.sunbeltnetwork.com that’s a nationwide (and 18 other countries!) organization specializing in the sale of businesses. Full disclosure – I am a member of Sunbelt Network.

    Also, depending on where you are looking you can drill down to the city or region.

    Good luck.

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