When making a decision on a business investment, you may be wondering if you should invest in a resale business.
It is important to understand pros and cons, as well as how to mitigate risks, so here are some insights:
PROS AND CONS OF INVESTING IN AN
INDEPENDENT BUSINESS RESALE
- QUICK START: The business is ready and operating, so you can start operations right away!
- FASTER TIME TO CASHFLOW: Starting operations right away can also mean a good opportunity to start generating cashflow quickly; of course, this really depends on the financial health the business has at the time of the purchase.
- ESTABLISHED CLIENTELE: Depending on how the business was managed, it might have a nice customer base, so your efforts in finding your initial clients can be significantly reduced.
- ESTABLISHED TEAM: If the business has a nice team of employees in place, this also helps you get started quickly without the need to find people to operate your business.
- HIGHER INVESTMENT: The investment level tends to be higher for an existing business, compared to a new one. And many times the asking price is too high as compared to the yearly net revenue.
- FINANCIALS MANY TIMES NOT APPEALING: The Financial Statements, such as P&L and Tax Returns, of many resale businesses, usually don’t present nice financial results. This can be due to fact the business is struggling (and the reasons can be multiple) or due to the fact the “books are cooked”, which means many businesses are able to “tweak” their tax returns with intent to save taxes, by either not recognizing all revenues or “inflating” the overall expenses. This results in poor disclosed net profit numbers. The problem is, it can be very hard to know if the numbers are bad because of a real issue, which could be the case, or due to tax deduction tricks.
- BAD FINANCIAL HISTORY CAN NEGATIVELY AFFECT INVESTMENT VISA PROCESS: In the case of the investment being linked to an investment VISA (E-2, for exampe), this can be a big issue! The immigration will look at the actual numbers (Financial Statements) and the low net profits can raise a red flag, and reduce your chances to have your VISA application approved. Many times, due to this issue you might need to commit to make a significant additional investment in order to claim that you do expect the revenue levels to go up once you become the owner. But this means you would need to spend a significant amount to invest + revamp the business
- HIDDEN ISSUES: this is the hardest issue related to buying a resale. It is very important to understand what is causing the owner to put the business on the market. Many times it could be a matter of retirement, geographical move, or health issue related. However, many times there might be one or several hidden issues and it can be hard to uncover what they are. The business might be struggling financially, new competitors might be stealing their profits, the business location might be under risk, customers might be unhappy, employees might be unhappy, and much more could be going on. It is critical to perform a very detailed due diligence! We recently were working with a client who was looking into buying a Coffee shop on resale. On the week they were going to visit the location, they discovered the investment asking price has just dropped 40%, and that raised a red flag. As they kept investigating to understand what was going on, they discovered that the location of the coffee shop was going to be replaced by a new development, and the coffee shop owner would have to leave it within less than one year…these buyers were lucky to be able to discover this issue before making the investment, but they almost missed this.
- YOU MAY NEED TO DO A LOT OF DAMAGE CONTROL AND REMEDIATION: many business will come with issues. As a new owner, you will probably start discovering them quite quickly after the investment, and you may need to spend most of your first year having to fix these issues. It may be a matter of regaining customer loyalty and influx, replacing employees, fixing operations, and restoring profitability.
So in summary, buying a resale business can be nice in terms of being able to leverage a business that is currently up and running, and not have to detail with the timing to start a new business. BUT YOU HAVE TO BE EXTREMELY CAREFUL not to buy a business with lots of hidden issues and that won’t generate the profit you are looking for! Sometimes, starting a new business is a great way to make sure all aspects of the business are working the way you want, so you can spend time really growing the business, and not killing ongoing fires.
INVESTING IN A FRANCHISE CAN BE A GREAT ALTERNATIVE TO BUYING AN EXISTING BUSINESS RESALE
One great alternative for avoiding the risks associated with buying an existing business, and at the same time avoiding the risks with initiating a new business from scratch is investing in a franchise.
Here are the main reasons:
- PROVEN AND REPLICABLE BUSINESS MODEL: A business will typically turn into a franchise only after the original business owner already had established a few independent units, has proven that it works and is profitable, and has proven that it is replicable. So you benefit from starting a business that is new but at the same time leveraging a business model that is proven to work – no need to spend months in trial and error
- LOWER INVESTMENT: Most times the investment will be much less than buying a resale business. For example, you could invest in a brand new property management or janitorial cleaning franchise for nearly U$50,000, while you would likely have to pay U$150,000 or more for a resale business in those industries.
- GREAT SUPPORT FOR A QUICK RAMP UP: at the same time you would need to ramp up your business from scratch, franchisors provide you with an amazing level of training and support so you can get up and running quickly. Not only many of them will help you with site selection, lease negotiation, and setting up the location, but they will also provide you with marketing programs and lead generation systems, as well as comprehensive training and ongoing support. Many will even provide you with a mentor who will work closely with you during the first several months.
- LEVERAGE A RECOGNIZED BRAND: many franchises have strong brands that are recognized and that by itself will help you build your initial customer clientele. So at the same time you are building your customer base for the first time, you will be able to leverage the franchise brand and recognition to attract new clients to your business.
- OPERATIONAL SYSTEMS IN PLACE: even though you would be starting a new franchise business, franchisors typically provide most of the operating systems and technology you need to get going. That includes, for example, back-office systems, customer management software, and so on.
- HIGH CHANCES OF SUCCESS: The United States Chamber of Commerce found that 86% of franchises opened within the last five years were still under the same ownership and 97% of them were still open for business. This is a great indicator that franchise business typically succeed and have a higher success rate as compared to new independent businesses.
REQUEST INFORMATION ON FRANCHISE OPPORTUNITIES:
Are you considering investing in a franchise but you don’t know where to start?