So you want to own your own business- Part I

​Market and Industry Investigation
The number one reason people opt to own their own business rather than work for someone, according to U.S. News & World Report, is the satisfaction that comes with being their own boss.  This is true even though entrepreneurship generally comes with higher stress, longer hours, and more risk. (http://money.usnews.com/money/blogs/outside-voices-small-business/2009/01/12/why-do-people-become-entrepreneurs )  Sometimes the motivation is the desire to create a job for themselves or possibly for family members, long term financial planning, or a particular passion or interest.

Once the decision is made to take the leap, in addition to deciding the type of business, a prospective business owner may consider two very common routes to ownership: starting the business from the ground up, or buying an existing business. Proponents of buying an existing business will say that it provides immediate cash flow, along with market position.  If the purchased business can demonstrate a sufficient level of cash flow, it is usually easier for the buyer to obtain financing to purchase the business than to finance a start-up. Typically the business comes with experienced employees and an established customer base, both of which reduce the immediate need for expertise and time investment by the buyer.

​On the flip side, you are paying for that existing income stream, so the initial cost may be significantly higher. If you can afford to support the business in its early days and delay drawing a salary, starting from the ground up may be a better option. While you won't get the benefit of someone else's experience, you also won't inherit their bad habits.

​The decision whether to build or buy should also take into consideration the prospective owner’s experience, capital availability, personal credit history, interests and demonstrated skills.  It also should factor in things like the level of difficulty involved in breaking into a particular industry, capital requirements involved in either buying an existing business or the costs of a startup, the competitive environment, location and specific market demographics.  This is not an exhaustive list- although it might be exhausting.

• Breaking into an industry – also known as barriers to entry: While the cost of getting started comes immediately to mind, other factors may play as big a role as money. Some industries are heavily regulated, some require specialized skills and/or licensing, and in some cases, having or being able to build, a relationship with a small client base is essential to success. Your job is to figure out what those factors are in your chosen arena, and work toward an objective assessment of your position in that regard.
• Capital requirements – what is the cost of buying the equipment, paying rent, hiring staff, and all the other things you will need to do before Day One of operations? In addition, how much money will you need in order to cover your personal living expenses, and to subsidize the business, during the early months before it reaches profitability? We’ll discuss how to determine this in more detail later, but for now, start a scratch pad of expenses as they come to mind, and try to talk to others who have similar businesses.
• The other guy – Who are your competitors?  Are they local, regional, national, or international? Are they physically located in proximity to you, or do they offer a similar product or service online? Look at their pricing, their business models, their marketing, and where possible, their financial performance.
• Location - how important is a convenient location to the type of business? If you are a restaurant, location becomes critical, including such things as proximity to where people work or live, adequate parking, and visibility to passersby. If you are a manufacturer, visibility probably is less important, but access to transportation and essential infrastructure becomes critical. Where are your clients, how do you interface with them, and what image do you need to project?
• Market information – Whether your market is a small town, or a worldwide internet constituency, no one is all things to all people. Who are you trying to reach?  Where can you find them, and how can you attract them?  How many of them are out there?

There are, of course, some things that are and will be out of your control, no matter how well you plan. Future economic events and conditions, changes in product demand, and the possibility of obsolescence due to technological advances are difficult to foresee and manage.  Unfortunately, much like parenting, there is no way to see the future, and decisions must be made in real time.
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In the weeks to come, we’ll take a look at various aspects of buying an existing business, considering along the way how the process might differ if the future business owner were to have chosen the path of a start-up.