Pros & cons of buying an existing business

Existing businesses are often sold when owners want to retire, move or do something else and may not have a family member to turn the business over to. Buying an existing business has a few advantages and disadvantages. You may be able to pick up where someone else left off with an existing location, product or service and network of employees, suppliers, and customers. However, you may also inherit messes the owners have left behind, like soured relationships and a poor reputation. Depending on the business you choose, the benefits and detriments can vary greatly. Let’s take a look at a few pros and cons of buying an existing business.

Pros of buying an existing business

  • As the owner, the business decisions are in your hands. You set your own vision for the company and make your own plans about how things will go.
  • There’s room for creativity and innovation. There may not be as much room as there would be if you were starting your own company, but still much more room than there would be in a franchise.
  • It’s often easier to get financing in place for an established business than for a brand new one, because existing businesses have financial records which show past profitability. Also, if you choose a company with a good history, your likelihood of success increases.
  • Equipment, staff, inventory, location and customers likely already exist. That cuts out a whole lot of those first steps and research that a business owner has to undertake when starting from scratch.
  • The product or service is already being produced, distributed and sold. You won’t need to worry as much about logistics and the finer details of starting this process at the beginning of your venture.
  • Relationships with suppliers, banks, investors, trade creditors, and other sources of financial supportare already established.
  • If you choose carefully, the equipment needed for production and operations processes should already be established. By studying existing processes, you can determine strengths, weaknesses, limitations and capabilities in advance.
  • You don’t have to pay any franchising fees or royalties. You may even be able to get a really good deal, particularly if the owner happens to be forced to sell at a lower price than the actual value of the business’ assets.

Cons of buying an existing business

  • Although they already exist, location, equipment and assets may be unusable or out-dated. You may have to spend a great deal of time and money replacing these assets.
  • A lot of inventory loses its value very quickly after it has been purchased. Don’t get stuck buying a great deal of “dead” stock, and make sure you know the quality of inventory you’re paying for.
  • The location may not be good for this business. You could end up paying as much as you paid for the entire company just to move to a more profitable location.
  • Depending on why the previous owner wanted out, the company may have no growth potential. Take some time to assess your plans for growth before deciding to buy.
  • Relationships with banks, suppliers, customers, and staff already exist — but what if the last owner was a jerk? It can take a long time to earn back a person’s or a company’s respect, trust and loyalty.
  • Watch for hidden reasons behind the sale of the company. Make sure the business’ great location the business can continue as your location. Is the lease renewable? Are the local conditions or economy worsening?
  • Check out the staff. Are they qualified? Are they productive? Do they have a good track record? Staff can be fired and re-hired, but you don’t want to spend a great deal of resources doing so.
  • Be careful of any legal issues. Make sure there are no lawsuits or unlawful activities that are either currently taking place or that took place in the past.
  • Perhaps the most challenging snag with buying an existing business is determining what the business is worth and how much you should pay for it. Be aware and get assistance from a trained business valuation accountant. If an existing business owner is reluctant to show their accounting records to you — the prospective buyer — or your accountant, stay away, far, far away.
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The difference between a chain and a franchise

To many consumers, chains and franchises can seem very similar, or even the same. However, they are quite different from one another. Here are the differences between franchises and chains:

What is a franchise?

Franchises are one pathway into entrepreneurship. With a franchise, a franchisee (the entrepreneur), buys the right to market and sell certain products and services from a franchisor (the person who owns the overall franchise) through a legal agreement. Fees and a share of the income are then paid to the franchisor over a specific period of time. The franchisee is in charge of operations, finances and HR for their specific location of the business.

There are several types of franchise agreements, all with different responsibilities, purchases, policies, procedures and rights. These terms are often outlined in the agreement and operation manual to make sure the franchise as a whole is consistent – a very important thing in franchising!

Examples of franchises

Most of us think of fast food when we think of franchise. However, lots of industries that have them, including automotive, real estate, accommodations, business services and retail. Tim Hortons, 7-Eleven, and RE/MAX Canada are all examples of a franchise.

Want to know more? Check out our blog post about the perks and snags of franchising.

What is a chain business?

A chain is a business that’s usually under one main corporate ownership, which opens and operates locations itself. This is the vital difference from a franchise. Franchise locations each have different owners, reporting to the main franchisor. But each chain location doesn’t have a different owner – each chain location is owned by the corporate office.

Examples of chain store

Some popular examples of Canadian chain restaurants and stores are Mark’s Work Wearhouse, Swiss Chalet, and Sobeys.

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small business products

Why diversify your business offerings

Why should you diversify what your small business offers? Here are some reasons why you might consider it.

Diversification is a buffer against slowdowns

You may have perfected a certain product or service that your customers love, but what happens when demand drops? As a rule, customers love variety and innovation. If your coffee shop has offered the same four styles of coffee and same four pastries for years, of course the new place down the street will attract some of your customers.

Resting too heavily on your laurels can leave you unprepared in a changing market. Diversify your products or services and you’ll stay competitive in times of reduced customer demand or economic slowdowns.

Planning your small business diversification

When planning ways to diversify your small business, ask yourself two things: 1) Does it make sense for my business? and; 2) Will it be profitable? Offering small, easy breakfasts at your coffee shop might make sense, but opening a dog grooming centre won’t (that’s not to say, however, that opening a second separate dog grooming business is a bad idea).

As we always like to say at GoForth Institute – do your research! What are your customers asking for, either directly or indirectly? What are your competitors doing to stay appealing? What trends is your industry loving – or hating?

Ways to diversify your business

Here are a few ways you can diversify your small business:

  1. Target new markets – Some customers might not care so much about your coffee shop’s amazing lattes, so why not become experts in tea as well? Get creative and look for markets that complement your own.
  2. Consider partnering – What opportunities are out there for partnership with companies related to your business, but not directly competing? Back to the coffee shop example – getting involved as a coffee supplier for local events will expose your killer espresso to people who may not have heard of you before.
  3. Go out of your “comfort zone” altogether – Were you the first to introduce fair-trade coffee beans in your town? Do you know everything about espresso? Why not offer your expertise outside the coffee shop? Consider speaking engagements on the importance of fair trade, consulting services to other cafés looking to make the switch, or offering “espresso-at-home” lessons to private groups.
  4. Go virtual – Can you use technological solutions or the internet to increase your business? Perhaps you can sell your café’s special roast online, or even your favourite coffee-related products.

Diversification in small business is often tricky to figure out, but infinitely rewarding. Not only will you have a bit of protection against reduced demand, but you’ll be learning a thing or two as well. As always, plan everything out on paper first, consult your advisors and – most importantly – have fun!

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What are the warning signs of a home-based business scam?

Many entrepreneurs choose home-based businesses, and some of those want to work from home with an established operation. For example: sales representative businesses or online home business programs. With these home-based businesses you’re part of an established brand and you get support from the company. However, not all home-based business programs are as good as they seem.

Some warning signs of home-based business scams:

  • Read the terms and conditions on the company’s site very carefully. You may be asked to pay a small fee for the start-up DVD or instruction guide. Be sure you can return the information without incurring even more fees.
  • Look for money-back guarantees or free, no-obligation trials. Make sure there aren’t sneaky clauses that mean you have no recourse if you change your mind.
  • If you’re being encouraged to “invest” in a “guaranteed” money-making business, be wary. Nobody can guarantee income, and they rely on you to pay a lot of money before you realize that.
  • If you’re being pressured or convinced to cash a cheque to pay for supplies, or provide personal or banking information early on, it’s most likely a scam.
  • Look for a contact number. If you can discuss the program with someone directly, then there’s a good chance it’s a legitimate home-based business opportunity. Be wary of people who can’t do in-person or virtual meetings, are evasive about your questions, or pressure you into signing up on the spot or paying for more information.
  • Research the company as thoroughly as you can. This can take the form of online searches on messageboards or member blogs, or it can also involve talking with people you know who may be involved with the program. If all you find are glowing reviews, that might be a sign of a scam. There isn’t a business around that’s 100% perfect.
  • Be wary of sites offering mind-blowing income promises. No business can promise you $10,000 a week for three hours’ work. If it sounds too good to be true, it probably is. Trust your gut feelings!
  • Even if income promises are realistic-seeming, many companies post the income expectations of their highest earners – not the average.
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