The dream of owning a small business doesn’t always mean starting from scratch. You can skip the headaches of creating a startup and jump to buying an established company. Purchasing a franchise offers another path to entrepreneurship. With either option, someone has already developed a solid foundation for a company. Here are some resources to help you decide if buying an existing independent small business or franchise is right for you.
Research Your Options
Even if a business seems successful on the outside, a closer inspection before purchasing is critical. In the SCORE podcast, “Buying a Business,” mentor Norm Silverstein details how to thoroughly examine an existing company.
When you acquire an established business, you inherit important intangible assets, such as a customer base and brand recognition. Risk is potentially lower than owning a startup because you will have immediate cash flow. Also, the previous owners have hopefully ironed out the kinks in the beginning stages allowing you to focus on the future.
After finding an affordable, promising business, Silverstein recommends using a “due diligence” process to determine if the company is a right fit. Some of the financial factors to investigate include:
- Profit and loss statements from previous years
- Projected financial statement
- Last three years of tax returns
- Cancelled checks
- Lease conditions
You want to learn as much as possible about the business beyond what the seller tells you. An attorney, accountant and a SCORE mentor can advise you during this intensive process.
Ready to Purchase?
You found your dream business, which passed a thorough investigation. Now what? You must decide whether to purchase the business entity or its assets. These are the major differences:
Buying the “business entity” entails buying the corporation or limited liability company (LLC). You inherit the assets and contracts but also its debts. You may not know what is lurking beneath the surface, such as tax liens or unpaid loans.
Buying the “assets” means you are buying the tangible items like equipment and property. However, you must create a new company with new loans, leases and contracts as if the seller’s business no longer exists.
For more details on the types of purchases, read the entire “Buying a Small Business: Assets vs. Entities” article.
Buying into a Community
Another road to small business ownership is purchasing a franchise. Bob Melberth, a franchisee coach, details the pros and cons in the SCORE podcast appropriately titled, “Franchising.”
What exactly is a franchise? An entrepreneur buys the license of a larger trademarked company to sell its products or services. The new offshoot is backed by a well-known brand name, training and support from the larger company and fellow franchisees. Melberth says, “You’re in business for yourself, not by yourself,” highlighting the community aspect of owning a franchise.
With this established business structure, the success rate of a franchise is usually higher than an independent business. You don’t need to be an expert in all aspects of running a company because the franchise provides specific guidelines to help sell their products. Even though it’s a franchise, it’s still your business.
Finding your ideal business can be a lengthy, involved process, but remember that you don’t have to do it alone—a SCORE mentor can help you along the way. After thoroughly examining the foundation, you may find an existing independent company or franchise is the answer to your small business dreams.
About the Author: Bridget Weston Pollack is the Vice President of Marketing and Communications at the SCORE Association.