Often those active in the small-business sector will have the opportunity to buy an existing small business, a client list or a franchise. Those with an entrepreneurial spirit should first look at what type of assets you have in place for the future.
Basic financial planning starts with having an emergency fund. How much you need in reserve depends on your circumstances. You should consider if you are married and your spouse works, if you’re supporting any dependents and the security of your and your spouse’s jobs. Average is to have about six to 12 months’ of living expenses. However, when starting a business, you may want to err on the longer end of that rule to help bridge the gap between the startup phase and your success.
Adequate capital is also a main concern, as insufficient financing is probably the most common obstacle to starting a business. While you may have the option to pull the principal out of your Roth IRA, to help during the startup phase, you want to be careful not to go too far. Even though this money was earmarked for your future, if the business venture does not work out, you run the risk of using assets that were earmarked for longer time horizons, such as your retirement.
You may consider other sources of funding, such as borrowing money from family and friends, offering others ownership interest in the business, or loans. Many small businesses look to obtain loans guaranteed by the U.S. Small Business Administration. If you choose this route, you should work with a small-business adviser who can help you navigate the requirements, and so you fully understand the terms. As a new business owner, you will likely need a detailed, two-year projection of income and finances, a minimum 12-month cash flow projection, and a comprehensive business plan on how you will achieve these goals.
When buying into a business, you also need to have a good idea if the business has a customer base that you’ll be able to maintain, and how you’ll do it. You should also consider the plans of the previous owner. If he or she decides to work part time or moonlight elsewhere, some clients will likely follow the previous owner. You should assume there will be some attrition to your customer list even if you are able to operate under the same name, same location or even with the same staff.
Even when buying a client list, you have to plan what you will do on day two. You need plans on how to acquire that first new client. The story going forward isn’t about the previous owner who built the business and its reputation. Your marketing plan should be focused on how you will communicate the value you can offer your clients.
With any business venture, you can benefit from the help of experts and a team of advisers. In addition to a small-business adviser, you may need a financial planner to help with your cash flow and retirement plans; an attorney with experience in small businesses to advise on legal structure and negotiate the purchase transaction; tax and accounting advisers to help with new business tax breaks and to establish accounting methods, and an insurance agent for both personal and corporate insurance policies.
Overall, it is important to remember you’re no longer just a doctor, a mechanic or an expert in your industry—you are becoming a business owner; therefore, you will need to begin thinking like a business owner, in that all decisions must be made in context of what is best for your business. As a business owner, your duties, concerns and responsibilities are significantly different. It is important to work at what you do best, but it is equally important that you work on the business itself.
Buying an existing business, client list or franchise involves becoming and thinking like a business owner. If you have questions regarding how this decision will affect your overall financial plan, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
Disclosures: This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
