Starting a small business can require extensive funding efforts, whether the money comes from personal savings, a bank loan or through a venture capital firm. Those efforts are often matched by the considerable elbow grease it takes to get a business up and running.
For those who can get the proper funding, there is another option: skipping the baby steps of a fledgling operation and diving right into ownership of an existing business.
Healthier Economy Prompts Growth in Small Business Sales
Sales of small businesses jumped 49 percent in 2013, according to a report by BizBuySell, which is billed as “the Internet’s largest and most heavily trafficked business for sale marketplace.” The report credits the improving economy and a spike in sales for retail outlets and restaurants.
“This year was the year of recovery that everyone has been waiting for since the September 2008 financial crisis,” said Curtis Kroeker, group general manager of BizBuySell. “After the onset of the great recession, transaction activity fell sharply until mid-2009 and then bumped along without meaningful growth. This created pent-up supply and demand that needed the right economic and capital conditions to materialize. In 2013, those conditions finally came together, resulting in a large increase in business transactions and contributing to a healthier small business environment overall.”
The report shows that more baby boomers are expected to sell their businesses in 2014, especially if the economy continues to improve. The recession caused some business owners to delay their retirement plans, according to an October story in the Wall Street Journal, but they can now take advantage of an improved financial climate. Andy Cagnetta, CEO of Florida brokerage Transworld Business Advisors, told the Journal that the Boomers are looking to deal.
“People who wanted to retire and feel like they missed the boat are absolutely seeing their businesses come back to the point where they’re saying they’re not going to miss it this time,” he said.
Still, Kroeker advises caution amid all the positive news.
“While we certainly are not completely out of the woods, the business-for-sale market is trending in the right direction and should continue on this path in 2014 and beyond,” he said in the BizBuySell report. “The great recession depressed sales activity for more than four years. So, while year-over-year percentage growth rates will almost certainly fall as we lap 2013’s robust activity, the absolute number of transactions should remain healthy. Simply put, the fundamentals are right for sustained transaction strength.”
Buying a Small Business Has Pros, Cons
So what are the pros and cons of buying an existing business? As detailed by the Small Business Administration, advantages include avoiding significant startup fees, and potentially having instant cash flow through the inventory already on hand. As for the disadvantages, the cost of the business can be higher than a startup because of all that the previous owner put into building it and its brand. The SBA advises there could also be “hidden problems,” including debts owed to the business.
Among the recommendations from the SBA:
- Buyers should keep their interests in mind when looking for a business to buy, and eliminate “unrealistic” ventures, especially if they don’t match up with the buyer’s skills and experience.
- Buyers should consider the possible negatives of the business, including the location and the potential time commitment it will require.
- Buyers should ask why the business is for sale, because “finding profitable businesses for sale at reasonable prices can be difficult.”