Why small business ownership is a ‘risky business’, and how to minimise that risk.
Buying a business is often a daunting idea. Most business owners consider going it alone – starting a fresh business and building brick by brick. Unfortunately, the stats say that around 50% – 70% of small business’ fail in the first 18 months, so how can you minimise the risk of the business failing before its second birthday?
Go with something that already works!
The best way to minimise the risk associated with a new business is to go with something that has already been proven to work. An existing business will have an existing customer base, trained staff and is already generating cash flow and profits. Along with this, you get an already established reputation in your industry, be it good or bad. Plus there are existing policies and procedures in place, that can make your job a lot easier. And at the the end of the day, it will still be your business – you can change it over time however you see fit, but still be receiving an income while you do so.
It can also be easier to get financing for an existing business, because the banks are taking less of a risk in lending you money if they can see that the business is already profitable.
But you must be smart about the business you purchase. If you are not careful you could get stuck with disgruntled employees, outdated processes and an obsolete inventory. This again comes down to one thing – Risk.
How do you best manage the risk of a potential buy?
This is all about selecting carefully, doing your research and often, getting help or advice.
Ask yourself these questions –
- What kind of business am I interested in?
- What are your skills/ strengths and weaknesses?
- What size of business are you looking for?
- Where do you want to open your business?
Then do your research.
Is there a market for your idea? Is it a profitable area? What is foot traffic like? Are there current businesses for sale?
Who can help you?
You may need to consider asking for a bit of advice or help at this stage. There are a few options to choose from –
1. Go it alone. Perhaps you already have some previous experience in purchasing a business, or have a skill set you can apply. This is the cheapest option, but often has the highest risk-factor.
2. Hire a business Broker. A broker will source businesses for you, and help you evaluate the risks involved in these businesses. They can help you decide what industry your skills would be best applied in, and what kind of business you should open. They can also help you negotiate a sale and even assist you with the mountains of paperwork that come with purchasing a business. Business brokers work on commission, and it is often a wise investment.
3. Source an ‘acquisition team’. An acquisition team can be a great asset to your business purchase. It usually comprises of your banker, accountant and attorney. This team will do the hard work for you, and really expose any flaws in the potential business you are thinking about purchasing. This team is especially useful when it comes to dotting the I’s and crossing the T’s, but obviously comes at a high cost.
No red flags? The location is good? It is already a profitable business? You have your team in place? You have minimised your risk as much as possible! Go for it! Good luck on your new business venture!