Is It Worth Buying a Business Established Under Three Years?
Is it Worth Buying a Business Established Under Three Years?
“Well-established” seems to be a very common bullet point when it comes to advertising the key considerations of a business for sale. Indeed, the longer the business has existed – the more attractive it should theoretically be.
Which, of course, leads to the question: what about buying a business that has been established for under three years? Is it too much of a gamble? Is it any better than simply starting a business from scratch?
Well, to answer that, we must first ascertain a few things: first of all, purchasing an existing business is often incredibly beneficial versus starting a new one. Successful existing businesses will generally have a track record of success and a reputable name within their communities. Businesses also have existing customer bases, established revenue streams and fully trained staff members, tried-and-tested systems and procedures among others. While most purchasers look for businesses that have been operating for years due to their stability and tenure, start-up businesses that have less than three years of operations are also appealing for several reasons.
All the Advantages of an Existing Business
A business operating for less than three years can have most of the advantages of one that has operated longer. It already has all of the plant and equipment needed to operate with minimal to no additional investments needed from a purchaser to continue. The business has also secured its lease agreement if renting the property from a landlord. The benefits may also be enhanced due to there being only minimal time spent on the lease agreement (considering that the terms are beneficial) and the plant and equipment should be in almost-new working order.
Benefit From the Hype Generated by Being a New Business
Most new businesses generate tremendous hype, which brings plenty of customers their way. New businesses that have recently launched benefit from increased visibility and word-of-mouth referrals, especially if the products or services are amazing in the eyes of customers.
While generating the initial hype may need a marketing budget, the lingering effects of referrals and high online reviews last for years to come. If the business continues to succeed, then it may entrench itself as one of the key establishments within its immediate vicinity and derive recurring revenue from loyal customers.
High Level of Potential
The sky is the limit for most young businesses. They have yet to meet their full potential and are still early or in the middle of their growth trajectories. As such, active owner-operators who have an aggressive mindset towards growth would have a perfectly malleable business that they can do as they please.
A motivated new owner with a keen eye for detail may help a fledgling business adjust its product catalogue or suite of services to focus on those with the best sales potential. It is also under a new owner that the young business may strengthen relationships with customers and suppliers to create excellent payment terms, secure beneficial agreements and construct a robust supply chain system.
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Flexibility of Operations
A fledgling business is typically very flexible. It may not yet have cultivated a certain brand image, which would make it very easy for new owners to change course. Perhaps the original product or service was not a big hit despite business plans and case studies saying so. A young business will have the flexibility of rebranding as long as it stays within its original industry so as not to waste the plant and equipment invested by the original owners.
For example, an Italian restaurant for sale has not been successful in selling its cuisine to customers residing in or visiting the area due to there being a handful of pizza shops and related establishments nearby. However, the new owner identified that it can start offering Japanese cuisine and benefit from minimal to no competition in the area, which enables it to have firm control of the market. The business having a fully equipped commercial kitchen could potentially rebrand and start offering a different cuisine to attain the success it was originally envisioned to have.
Have a Plan
Despite there being many advantages to purchasing a young business, it is still very important to have a plan in place as if you were planning for your first three years as a business owner. It is also very important to learn as you go as you study the market and be willing to change tracks when necessary. Other important things to consider for purchasers acquiring a start-up business are diversifying customer bases, staying within the budget, delegating work to skilled staff members and harnessing the skills of contractors whenever necessary.
Conclusion
Most purchasers would be looking for an established business to benefit from the stability of operations and a consistent revenue stream. However, young businesses that have been operating for under three years also deserve to be scrutinised. It may be possible to find a diamond in the rough that is just waiting for a motivated new owner to help lead it to its full potential with the potential promise of exponential financial reward.
It is incumbent on Business Brokers to identify the key strategic advantages of this new business –, particularly when compared to other longer-established businesses in the market, and turn these into Key Considerations to Prospective Purchasers. If you are a Vendor bringing such a business to the market – a savvy strategy should be to ask your Broker how this is going to be laid out in the Information Memorandum.
Tags: buying acquisition small business entrepreneurs
About the author
Farzin Hesari
Farzin Hesari, CEO of LINK Australia, is at the forefront of revolutionizing the business brokerage industry. With a laser-focused vision on expanding ...
