SOME OF THE DIFFERENCES BETWEEN
STARTING A BUSINESS AND BUYING A BUSINESS

To start a business, you look for a vacant property, you consult the real estate ads and real estate brokers, and you look for signs on the front lawn saying “For Sale” or “For Lease.” To buy a business, there is no vacancy to look for, there are no signs on front lawns because business sellers usually act in secrecy, and you consult the business-for-sale ads. You also consult with business brokers, but their competence is uneven because they usually are not regulated by the state as are real estate brokers.

To start a business, you must design the concept including the choice of equipment, layout of the store or shop, and who your customers will be. To buy a business, there is little to do along these lines because these decisions have already been made.

To start a business, you have to buy equipment. To buy a business, the equipment is usually in place.

To start a business, you may have to do a demographic study. To buy a business, a demographic study is rarely required.

To start a business, you do not have to learn how much the seller has been cheating on taxes or what skills he or she possesses that you may lack, because there is no seller. To buy a business, it is imperative to learn or estimate these key facts. You must also determine whether the seller’s customers will remain as your customers.

To start a business, you do not have to make a business appraisal. To buy a business, an appraisal is a necessity and it is often the buyer’s most difficult challenge.

To start a business, you do not have to negotiate the price and terms of the purchase although you may do some relatively minor negotiating of the equipment prices and rent. To buy a business, you not only have to negotiate the price and terms, but you must do so under emotional conditions rivaling those at graduations, weddings, divorces, and funerals. Moreover, the perplexing dichotomy of motives between getting the best price and closing the deal complicates the relationship with the seller. It also reduces the chances of ever closing the purchase.

Whether you start a business or buy a business, you might require bank financing. In either case, you will have to prove to the loan officer your qualifications for ownership. But to buy a business, you have to show that the existing business is profitable enough to pay the bank loan with a comfortable margin of safety. That’s a major challenge because almost all small business owners and their accountants use every trick in the book, and a few tricks not in the book, to hide the earnings from the IRS. The buyer has to reveal the earnings without blowing the whistle on the seller.

To start a business, you probably should hire a lawyer, not for any special purpose, but just to look over the entire setup to keep you out of trouble. To buy a business, you absolutely need a lawyer to prepare a contract for transfer of ownership containing a raft of protective covenants including some to protect you from inheriting the seller’s liabilities.

To start a business, most lawyers will be adequate for the job. To buy a business, you need a lawyer whose people skills are at least as sharp as his legal skills. That’s because the high emotions of small business purchases and sales exacerbate even the most minor of incidents of rude behavior—like screening telephone calls, as lawyers often do—and they tend to kill the deal.

The above list merely outlines some of the differences between starting a business and buying one. The point is that teaching students how to start a business is, at best, only a partial education in how to buy one. And it teaches them nothing about selling.