Start-up Business vs. Buying a Cash-flowing Business?

Whether to start your own new business or buy one that’s already underway and generating income is a class question.

If you look at the ROI of the total investment for a start-up business, you have to know the cost to purchase the assets/inventory needed, leasehold improvements to make the facility ready for occupancy, amount of capital to supplement the income needed until the business starts seeing enough of a cash flow to support you (typically three to five years) and more. Adding up those expenses gives you the “project total.” Be sure to consider the working capital required to cover the probable business losses during the three- to five-year period of ramp-up. This should all be considered as part of the project total.

Now look at existing businesses and compare what you can buy based on the project total of a business that is already functional and generating a cash flow. Analyze the investment required to buy a cash-flowing business compared to a start-up and the estimated owner benefit for that initial three- to five-year period, not to mention the value of the peace of mind of knowing you have positive cash flow from day one with an existing business.

For the existing business, include the total purchase price, working capital needed for accounts receivable, inventory, landlord deposits and paying the bills until you receive the cash from sales, all of which is part of the project total. Now consider that you can borrow 75% to 80% of the project total with an SBA Guaranteed Loan, typically at 2.75% points over the WSJ prime rate, with a 10-year amortization. Calculate and deduct the loan repayment amount and a salary for yourself from day one, both to be paid out of company profits. 

What you will find is that for the amount of cash injection you invested with the cash-flowing business, you are making a lot more money compared to a start-up, and you will be able to sleep at night knowing  you are making money from the beginning. The issue then will be finding a quality business with complete and accurate accounting records, in the geographic area your desire, that you can have fun with and is scalable. They are out there; finding the right one for you will just take some effort.

As a seller or a buyer, if you would like a confidential conversation about how to prepare to buy or sell a business, please contact me on my cell, 954-579-4687, or by e-mail at bobd@dolansales.com. My LinkedIn profile is at http://www.linkedin.com/in/dolansales.

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