I have represented buyers and sellers of businesses for thirty years. There is no single right answer to any of your questions. I have seen buyers who bought a business for a good price, developed it further, and did extremely well with it.
Originally Posted by oceangerl
I have also seen buyers who overpaid for the business, failed to understand the risks and threats facing the business, operated the business poorly or simply had bad timing or bad luck.
That said, here is my stab at answering your questions:
Buying a going business is often a great way to get started. Typically you have a ready-made revenue stream and all the major pieces are in place. You need to be careful, though, that you don't pay too much and that you understand the business BEFORE you buy it.
Is it good way to get your feet wet rather than start from scratch?
In today's volatile economy, there are more unknowns so perhaps it is a bit more risky than at other times. On the other hand, because of those risks and the fact that financing is much harder to obtain, the prices that businesses are selling at in terms of multiples of EBITDA (earnings before interest, taxes, depreciation and amortization) are very low. In that respect, there has rarely been a better time to buy if you have the ability to finance both the current and intermediate term capital needs of the business.
A good move with today's economy?
Once you purchase the business, the pitfalls and warnings are basically the same things you should be looking out for if you had built the business from scratch. BEFORE you purchase the business, there are many things you should look out for. You should make a careful investigation of the business (called "due diligence") with an experienced team of advisors, including an accountant and attorney, and others that will depend on the type of business you are buying.
What kind of pitfalls or warnings to be heeded once you purchase the business?
Yes. Even a successful business needs working capital. In fact a growing business often needs more working capital that a shrinking business because it needs to increase the amount of its inventory and accounts receivable, among other things.
Do you need to have additional working capital in addition to buying the business itself?
Personally, I think anyone who buys a business (or starts one, for that matter) needs a business plan. If you are going to get any institutional financing for your purchase, the bank will almost certainly insist on seeing a business plan unless you have so much other collateral that the bank is really not making its loan based on its expectations for the business.
Do I need to have a business plan in order to run and manage this existing business?
Yes and yes. Yes, you will have the ability to change the name. Yes, it is often not a good idea because part of what you are typically buying is the goodwill of the existing business, which is usually tied to its name. Of course, there are exceptions.
Will I have the ability to change the business name to a new one once I buy it from the owner to fit my goals and vision or is that not a good move if people are used to coming to this business for years under old management/owner?