Why would you buy something that is broken?!

Many entrepreneurs feel this exact same way when they look at purchasing an existing business as opposed to starting a new one. This alternative plan for becoming your own boss is often complicated and dangerous. An entrepreneur must consider many things when deciding to purchase a venture that is for sale: Why is this company for sale? Is there a demand for these products or services? Or were the employees just lazy? Or did they just have the wrong target market in mind? Either way, a new entrepreneur might not know until it’s too late.

Some entrepreneurs may think this is an easy way to start a business – that there may be an existing customer base so they would not have to re-market or “re-invent the wheel.” But without knowing that these customers are loyal and believe the company has a good reputation, this might be time AND money wasted. When I was looking for markets to start a pet-sitting service in, I came across what seemed like a great deal: a mobile dog grooming bus. Trust me, for avid animal lovers like myself, this bus was the most adorable thing I’d ever seen! And with a name like “Puppy Fresh Express” I thought it was brilliant. I had looked into this so I knew the original cost was far steeper than what it was being sold at. But for me to already have in my hands the key to a very attractive bus, with all the equipment already in it, it sounded like the easiest business plan ever! I could be up and running in no time…or could I?

Like most entrepreneurs, I knew to do my research. Turns out folks in the area where this bus was operating liked to frequent an upscale pet food store which had their own self-wash tubs in them. There was also the issue of you had to be home when the bus came to bathe your pets – most customers felt like if they had to block out an hour of their time, then they’d rather just do it themselves. While during the time of the gas crisis, I felt like the owners weren’t using the right message to advertise. I felt they should be advertising that they are trained groomers and would do a professional job that most owners could not do. I also felt they should have drilled home the message that this WOULD save the pet owners time AND gas. I felt like just because it failed for them, didn’t mean it would not be a success for me.

But I began to see…businesses sell for a reason. You wouldn’t treat a classified ad any differently – if you saw a used car or a computer or even a parrot in the newspaper, your first question to the seller is always: “Why are you getting rid of it?” Now, with a business, there may be some aspects that you see as valuable. In my case, I saw the actual grooming equipment and bus as assets. Would it behoove me to purchase the business as a whole and run it as it had been but with my ownership and new marketing tactics? Or would I want to purchase the assets and start from scratch with my own business? This takes us down the path of realizing the value of the venture. Would my sales in a market that hadn’t been receptive be enough to cover the cost of the van, etc.? There are business valuation formulas on the web which can help you calculate the value of a business you are looking at purchasing. For example, a mobile dog grooming business is valued at 2.5-3.0 times its revenues (www.daltonbusiness.com). From here you would weigh in what you would have as far as cash down, would you need the seller’s financial aid, what improvements would need to be done to the business, etc.

While it seems like an easier way to start a business, remember to ask one important question: Would you buy something that’s already broken?