Buying a Business vs Starting a Business: Everything You Need to Know
The decision to buy or start a business can have a big impact on your finances, the time you must invest, and your personal satisfaction as a business owner. Thanks to the pandemic, there are even more hurdles to take into consideration:
Many industries must radically change to succeed during 2021, and after the pandemic ends.
Economic conditions make it more challenging for a buyer to obtain financing from traditional lenders.
The pandemic has changed how we work and play, and many post-pandemic business opportunities may be new to you.
Read on to find out what you need to know about buying vs. starting a business.
What is the Post-Pandemic Plan?
Every business needs a plan to succeed in a post-pandemic environment. Whether you buy a business or start a new venture, you need a plan to address the new reality.
The plan must include strategies for doing business in 2021 as the vaccine is distributed, and for operations after the pandemic is over. Perhaps most important, you need to decide how you’ll operate if a similar crisis occurs down the road.
Different Businesses, Different Plans
Many owners have pivoted to serve customers effectively during the pandemic. To survive financially, owners have used trial and error to figure out new ways of doing business.
If you operate online, or mostly online, the short-term and long-term plans will be nearly identical. An e-commerce business selling men’s clothing online can use the similar business model during the pandemic, and afterward.
Businesses that serve customers in-person face more challenges. A restaurant, for example, may have two very different plans. The business may have shifted to primarily carry-out and delivery during the pandemic, but plans to return to inside dining after the pandemic. These businesses will spend more time and money to shift from plan A to plan B.
What is your business plan?
Starting a Business Post-Pandemic
If you’re starting a business now, you need to follow these steps:
Talk with other business owners about managing during the pandemic. It created a personal and financial strain for nearly every business owner, and you can learn from other people’s experiences.
Document your procedures for doing business. Write down each task you must perform, who completes it, and how often.
Write a formal business plan covering marketing, sales, operations, and financial projections.
Pause and reflect on your business plan. Is it a comprehensive plan that you can implement with the resources you have available?
Buying a Business Post-Pandemic
If you find a business that you’re interested in buying, find out if the owner has thought carefully about these same issues. Ask them these questions:
How did your business operations change during the pandemic?
How much business have you maintained? Are key customers still doing business with you?
What is your post-pandemic business plan?
A good business manager should be able to answer these questions. If not, it may be an indication that the owner does not have a viable business plan in place.
Adding Value After a Purchase
You may have a strong interest in buying a business, if you have a strategy to increase its value. This is particularly true for purchasers who have experience in the industry. Here are some ways a buyer can add value, and increase profits.
Find More Client Problems to Solve
Customers buy products and services to solve problems, and you can increase sales by solving more problems. Find out what your core group of loyal customers needs from your business, using these strategies:
Survey: Provide an online link to complete a short (under 5-minute) survey, and reward those who participate. The reward might be a gift, or a discount on the customer’s next purchase. Gather the data and analyze the responses.
Customer interaction: Train your staff to ask questions whenever they interact with a customer. That includes online chat, phone support, or a store visit. Ask customers about their experience with your firm, and if you can provide other products that solve a problem.
If customers are satisfied, you can grow market share by diversifying your product and service offerings. Food and beverage companies do this all the time. If customers like Tide® laundry soap, for example, Procter & Gamble is more likely to add more versions of the product.
Differentiation, Niche Businesses
When customers see a business as different from the competition, they may be more likely to make a purchase. A great way to differentiate a company is to focus on a specific niche.
A niche allows you to become the “go-to” provider for a product. The owner can dig deeper to find out more about customers needs, and fill them. You’ll find niche businesses in the pet food industry, where companies focus on specific types of pets, and types of food- including organic products.
Profitable businesses can become inefficient over time, and a buyer may be able to streamline operations to increase productivity. Automating manual processes will free up the staff’s time, so that employees can focus on tasks that add more value. Payroll and invoicing are two areas that can benefit from automation.
Are customers willing to pay more? Owners who operate profitable businesses may not consider this question.
When a company drives a large amount of repeat business, customers value the product and may be willing to pay higher prices. A new owner can experiment with a price increase and assess the impact on sales.
Improve the Collections Process
Cash inflows are just as important as profit, and every business needs a formal collection process for accounts receivable. The process must include emails and phone calls, based on the number of days since an invoice was sent. If no plan is in place, a buyer can increase cash collections using this approach.
If you can implement these strategies, you can increase the value of a business after a purchase.
To make an informed decision to buy or start a business, work with an experienced business broker.
How a Business Broker Adds Value
Your decision to start or purchase a business requires a huge financial commitment. Starting or purchasing a business is also time consuming, and you need the help of experts before making such an important decision.
A business broker can serve as your trusted advisor throughout the process. To find an experienced business broker, talk to your network of business peers. Attorney and CPA contacts are also helpful, because they work with brokers on business transactions.
The Initial Conversation
When you find a broker, plan a long conversation about your business goals:
Explain your business background, so the broker understands your areas of expertise.
If you have an idea for a new business, review the business plan with your broker. They work with dozens of businesses and can provide valuable feedback on your idea, and the industry.
Discuss the current market for business purchases. What is the current level of selling activity?
If you decide that purchasing a business is the right approach, a broker can keep the buying process on track, and represent your best interests.
Business Value Discussion
The broker can help you uncover the true value of a particular business, and areas of potential improvement. Brokers work to find out the seller’s motivations, which may be to retire, start another business, or simply to avoid burnout. The motivation of the seller can impact the ultimate sale price.
Buying a Franchise
Your decision may be buying a franchise vs. starting a business. Brokers understand the unique opportunities and challenges of investing in a franchise.
When you purchase and operate a franchise, you must comply with the requirements of your franchise agreement, and agree to extensive training. Operating a franchise puts more restrictions on the franchisee, but franchises offer brand awareness, purchasing power with vendors, and a proven recipe for success.
Managing Due Diligence
Brokers work to gather financial records, customer lists, marketing plans, and other documents for your review. They keep the process on track, and will also review the seller’s contracts and other agreements.
Work With a Trusted Advisor
Your Raincatcher business broker will negotiate the final sale price, and assist you in order to maintain a smooth transition after the sale. Work with a broker today to make a decision about starting or buying a business, and complete the process with peace of mind.