Why Are Businesses So Expensive to Buy
Buying a business that has already been successful for a while is a great way to bypass a lot of the most annoying parts of creating a profitable business. But it is not a great way to save money. It is typically far more expensive purchase an existing business than to create a business from the ground up.
Many people wonder why it is so expensive to purchase an existing business verses starting one from scratch.
The Short Version: Proven-successful businesses are expensive because they are worth it. A business that has pulled in an average of $X/year for a few years can easily sell for $2x (or even $3x if it has strong signs of growth). Looking at it purely from an investment standpoint, you can usually expect to receive a far better ROI from buying a successful business than if you put that same money into a typical stock.
The Long Version: When you buy a business, it can be valued in terms of its assets and liabilities – but there are a ton of intangibles that come with buying an existing business as well.
First and foremost, you have the employees. It is common for some investors to look at payroll as a cost they must grudgingly pay, but it is much smarter to view your employees as further investments; the better they are at their jobs, the more successful your business will be, and the more it will grow. Purchasing a business that has a solid roster of experienced employees that do not require a lot of intervention from the owner means that you have to spend less time maintaining your income stream.
Second, you have an existing client base and reputation, two of the most difficult things to establish if you are starting from scratch. Fortunately, it is much easier to maintain a customer base that loves you than it is to grow one from people who have never heard of you. Underlying these, you have the existing design (logos, colors, name, tagline, and so on) that the company uses to identify itself to its customer base.
Depending on the business, you may also have some number of intellectual properties that are patented, trademarked, copywritten, or otherwise protected, each of which adds to the value of the business.
Are Businesses Worth Buying: The obvious answer is “no, not all businesses are worth buying.” Some businesses are failing due to bad business plans, poor quality products, or even a social media scandal. But more than that, there’s also the simple question of do you have the skills and passion to operate successful within the given industry? Because buying a profitable business that you care nothing about and/or you are not qualified to run is almost certain to end up in you owning a poorly performing business. If you invest in an industry you already know and care about, you are much more likely to maintain its profitability.
With so many variables to consider and so many potential pitfalls to avoid, the best first step for those who want to purchase a business is to obtain expert guidance. A business intermediary can give you the help you need to find the right business to match your passion, skills, and budget. Business brokers have extensive experience with these types of transactions, and they typically have access to the widest number of available business listings for you to choose from.