A person becomes a small-business owner in one of three ways: taking over the family’s business, buying an existing firm, or starting a new firm. Each has its own set of problems and opportunities.
Taking Over the Family’s Business
Every year many firms are taken over by relatives, often by people who were “brought up” in the business. These people were prepared to step in and take over when the former owner died or was no longer able or willing to run the firm.
But sometimes the person taking over has not worked in the firm, and the takeover is on short notice. A person who feels obligated to take over the business, but is not prepared to do so, is likely to fail.
Many owners do little planning to help ease the burden for heirs. A recent poll revealed that only 45 percent of the owners of family firms had selected successors. One expert recommends the preparation of a kit containing such materials as a list of helpful advisers, the location of key documents, and advice on business strategies and on whether the survivor should sell the firm or continue running it.8
Buying an Existing Firm
Many people go into business by buying an existing firm. You should first find out why the owner wants to sell. If the owner wants to retire, check out the firm’s profit over the past few years. If it is acceptable, you might be able to reach an agreement whereby the seller helps you learn the business from the ground up.
On the other hand, the owner might be trying to unload a business that has not made money. Your job is to find out why the firm made no profit. Is the good or service the problem? Is the cause poor management? What would it take to turn the business around?
Buyers often pay a premium price for successful firms because that is easier and perhaps less risky than starting from scratch. But the seller might have a history of selling out and then opening a competing firm nearby. The buyer needs a no-compete clause in the contract a clause in which the seller agrees not to set up a competing firm in the area for a specified time, such as two years.
Starting a New Firm
Starting a new firm is better in certain ways than buying an existing firm. The owner can build the firm from the ground up. There are no unhappy customers, no obsolete plant or inconvenient store location, and no bad debts. Moreover, there is no premium to be paid to the old owner for buying an existing firm. On the other hand, there is no customer base to begin with.