If you’re thinking about becoming an entrepreneur, you may be wondering whether you’d be more successful starting a business or buying an established business.
“‘Start your own business, open your own shop’ has always been part of the American dream,” observes Josh Tolley, nationally syndicated talk show host and author of the recently published Acquisitional Wealth.
“Sadly, few people pay enough attention to statistics that show approximately 50% of start-ups fail within five years. However, if a business remains open for a decade, the odds are that it will survive and has the potential to be marketable. So, if you have the option of investing in a new business or buying a well-established, going concern, just think of the hassle, worry and grief that can be avoided. But you’ve got to go about it the right way, realize the importance of having your own support team, and don’t even dream of doing it alone!”
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Don’t fall for social media instant experts
In recent years, a number of our clients have run their business ideas by my staff — ideas and schemes, as Tolley correctly points out, “that often (stem) from a growing social media presence of insta-experts and coaches who sell do-it-yourself, expensive ‘how to buy a business’ courses, along with a list of several self-named resources that are available to buy now from their websites.
“Very much like the stock market mania of the COVID years, otherwise sober, mature adults act more like high school kids infatuated with their first love. This is where the failure to have competent, professional help and guidance can prove costly,” he says.
I asked Tolley to set out some of the most glaring mistakes anyone wanting to buy a business can make.
1. Follow the wrong advice and think you can do it on your own.
So many people are trying to go it alone, following the advice of an online business coach who says, “I can guide you in buying an ongoing business, so why pay for a lawyer or an accountant?”
The result is an epidemic of financial and legal problems. If you are buying a business, definitely use the experience of a broker, a transactional attorney and, if applicable, an accountant familiar with the dynamics of the enterprise. “It's going to save you years of headaches, stress and possible legal ramifications to the business,” Tolley notes.
2. Buy retail or income-producing property.
The second most frequent mistake is getting into either retail or income-producing real estate. Tolley underscores, “Retail is not where you want to start, and you must accept the fact that there is a lot of unstable ground when it comes to retail. Restaurants are retail. Anything can upset the apple cart, from a pandemic to even construction on the road in front of the business/restaurant you just purchased.”
He makes a strong case in his book: “Make sure that you are purchasing a business that is not dependent on retail conditions, but instead depends on market or B2B (business-to-business) conditions.”
3. Think you’re going to be successful without going all in.
Contrary to other endeavors in life, if you're going to acquire a business, jump in entirely or don't jump in. “Once you have acquired a business,” Tolley points out, “you have to commit and really go for it. So often, I’ve seen the results of ‘entrepreneurs’ who tried to continue working their regular job. A variant of that mental process thinks, ‘Well, we saved $200,000 for a down payment, so let's try $50,000 down to just give it a taste.’ That never works out.”
4. Change your team of advisers during the process.
“Don't listen to your friends who might have owned one business once or who have no experience at all,” Tolley cautions. “This isn't a time to get a consensus from friends and family. Unless they've done this successfully, their opinions don't really carry a whole lot of weight. As many first-time buyers don't come from a business background, their friends and family tend to have a similar lack of experience, and so their advice may lead down incorrect paths.”
How to prepare to buy a business
Before buying a business, you have to prepare financially by:
- Keeping your credit score high
- Not incurring any unnecessary new debt, such as a new car
- Postponing any sort of credit hit until after the purchase
- Ensuring your tax records are clean and up-to-date
Concluding our interview, Tolley shared a prescription for a successful business purchase by someone who has never before owned or operated a business: Start learning as many business skills and acquiring as much practical business knowledge as you can, rather than focusing on specific industry capabilities.
“Your overall business skill set is going to serve you much better in acquiring the company and running it successfully,” he says. “For example, with a restaurant, how to manage employees is going to serve you better than mastering a risotto recipe. Related and important skills will come with the business; knowing how to drive the business — like learning how to not just drive a car but race it and win — is now your goal.”
Dennis Beaver practices law in Bakersfield, Calif., and welcomes comments and questions from readers, which may be faxed to (661) 323-7993, or e-mailed to Lagombeaver1@gmail.com. And be sure to visit dennisbeaver.com.
Related Content
- What Not to Do if You Join Your Family Business
- Thinking of Starting a Business? Tips for Avoiding Failure
- Selling Your Business? Beware of Potential Blind Spots
- Is Someone Sabotaging Your Company? Is It You?
- How to Lose Your Shirt Investing in a Restaurant
-
I'm 57 with $4.1 million and looking to retire abroad in a few years. I no longer see the point in contributing to my 401(k). Am I wrong?We ask financial experts for advice.
-
Potential Trouble for Retirees: A Wealth Adviser's Guide to the OBBB's Impact on RetirementWhile some provisions might help, others could push you into a higher tax bracket and raise your costs. Be strategic about Roth conversions, charitable donations, estate tax plans and health care expenditures.
-
Potential Trouble for Retirees: A Wealth Adviser's Guide to the OBBB's Impact on Retirement
While some provisions might help, others could push you into a higher tax bracket and raise your costs. Be strategic about Roth conversions, charitable donations, estate tax plans and health care expenditures.
-
One Small Step for Your Money, One Giant Leap for RetirementSaving enough for retirement can sound as daunting as walking on the moon. But what would your future look like if you took one small step toward it this year?
-
This Is What You Really Need to Know About Medicare, From a Financial ExpertHealth care costs are a significant retirement expense, and Medicare offers essential but complex coverage that requires careful planning. Here's how to navigate Medicare's various parts, enrollment periods and income-based costs.
-
I'm a Financial Planner: Could Partial Retirement Be the Right Move for You?Many Americans close to retirement are questioning whether they should take the full leap into retirement or continue to work part-time.
-
From Mortgages to Taxes to Estates: How to Prepare for Falling Interest RatesAs speculation grows that the Federal Reserve will soon start lowering interest rates, now is a good time to review your financial plans for housing, estate, taxes, investing and retirement to make the most of potential changes.
-
This Is How Lottery Winners Build Lasting Legacies, From a Financial ProfessionalWinning a massive lottery jackpot, like the recent $1.4 billion Powerball, requires seeking immediate legal and financial counsel, protecting your identity and winnings and planning your legacy.
-
I'm an Investment Strategist: This Is How the Fed's Next Rate Move Could Impact Your WalletInterest rate cuts might be coming, which could affect everything from your credit card debt to your mortgage. It's smart to prepare now — here's how.
-
I'm a Retirement Planner: These Are Three Common Tax Mistakes You Could Be Making With Your InvestmentsDon't pay more tax on your investments than you need to. You can keep more money in your pocket (or for retirement) by avoiding these three common mistakes.
