If you have cash and already have previous experience running a business the short answer is: "buy" it. However, most of us do not have the cash sitting around to just go out and buy a profitable business so we have to come up with a little more creativity to help us determine how to proceed.
Below, I give you 10 ideas that will tell you if buying an already profitable, running skin care spa might be a better option for you.
1) Every banker knows that the 5 year success rate for existing businesses is much higher than that of a brand-new start-up. Go, ahead. Ask your accountant. I'll wait... What this statement really means is that if you could spend the same amount of money starting a business as you would buying an existing business, one of these paths will probably result in failure and the other in a win. Why? Because of the next point...
2) The real secret behind all successful businesses is having an established and engaged customer list. If you are starting a business, being able to communicate with a known group of previous customers can provide the business with immediate cash flow. This alone is a major factor on the path to success.
3) It is a lot easier to find a funding source to help you finance an existing business. But it is almost impossible to find funding to start a new one. Bankers, venture capitalists, and even mom are quite aware of the dangers of a new businesses. They completely and fully understand the risks at a gut level. Your spa is simply much more likely to get a loan when the business already has cash flow. Period.
4) Often, people who want to sell their businesses will help the next owner by financing the sale at very practical terms. They often do this for tax reasons. Most sellers would prefer to postpone gains over a longer period of time versus taking it all at once just to give it away to Uncle Sam. Also, if a seller agrees to finance some of the sales price of the business, it is because they absolutely believe that the business will succeed.
5) The other side of the coin is that sales estimates for a startup spa are nothing more than an informed (or not-so-informed?) hunch. Estimates for existing businesses for sale rely on verifiable historic data. Which would you bet your life savings on?
6) A hidden fact: New businesses tend to cost far more to start than their owners anticipate. Most start-up spa owners find that they could have purchased an existing company that came with customers and cash flow for the same amount they eventually shelled out for their business.
7) A side note to the previous point is that it may be possible to spend less money thorugh a down payment to buy an existing spa than if you started your own. A working business has the ability to begin paying for itself right away. If a spa has a decent track record, people will bet on it. A brand new start-up is not finance friendly. It is impossible to estimate the amount of cash needed to get a brand-new business to a positive cash flow. People are wary of money pits.
8) Established web traffic is a good sign also. The more authority and traffic a website has, the more valuable the business tends to be. Brand-new sites have no guarantee of success. Google will still need to discover and value it. An authority website is a huge asset, and no brand-new business will have this starting out.
9) Many businesses for sale are actually under-priced. You can sometimes find a business for sale that costs less than the cost of going out and buying the assets individually. If you bought it all new, you'd probably pay more and still have no list of previous customers!
10) An existing book of customers is key to the survival of any business. In the current economic environment you have to ask yourself how hard is it to get new customers? Right now I'd say it's pretty darn hard!
So with all those points in mind you'll have to make your own decision about which way to go.
For some, the answer, due to whatever reason, will be to bootstrap and start your own business from the ground floor. The logical question would then be: What is the best way to finance a new start-up?
My response: with cash from your savings.
No savings? You are not alone. So what other methods are there?
The financing option that is best for you depends completely on your idea, market, and money situation. Your personal financial resources are the most important factor (i.e. your credit score).
Below are a few of the most typical ways to fund a brand-new spa.
All methods of financing have good and bad points and most may not fit your current situation, but they are listed for your information anyway.
Whatever method you pick, go explore the idea fully and do not enter any commitment blindly. Always speak to your tax or other professional because we are not giving you advice here. Just letting you know what the options are!
Ways to Finance Your Start Up Spa!
*Raid Your Savings and Investments
The initial source you need to consider is your own savings and investments.
Self-financing your business does not leave you in debt to others if the business fails. If the ship sinks, it is only your cash that goes down with the ship.
If you're not willing to risk your own savings, you should not take chances with anyone else's.
*Raid Your Friends and Family
After raiding their own cookie jar, business owners often start eyeing the pocketbooks of their loved ones.
If you have a large, wealthy family this might work. But: NEVER take a business loan from anybody you will be eating with on Thanksgiving.
Nothing causes more family fights than loans that will never be paid back.
Your family members may offer you money, and often they don't start out treating it seriously, at least not in the legal sense, with paperwork and all. But, don't kid yourself. They will expect it back at some point. Remember, when a family member invests in your business they are really buying you and trusting you.
Imagine sitting down with your family and friends for your next holiday meal. Your uncle casually asks "How's that beauty spa idea working out for you?" How would you feel informing your parents, friends, and family that you've "pooped the money bed" with their funds? "Yep mom, unfortunately we've shed your life savings right down the toilet, danged economy!---Now could you pass the pumpkin pie guys? I'm famished!"
*Raid Your Credit Cards
I know someone who financed their spa on plastic and a dream. This could have backfired, sure. Their business could have failed and left them with serious debt that would have taken until the year 2099 to pay off. But...
...It worked out. So there's that option. If you choose to fund your company on plastic just remember that you will be paying through the nose. Not "The Godfather" high interest rates, but high. And unless you succeed big, you will be paying for many years to come.
*Raid The Home Mortgage
Bank loans are rather difficult to get if you do not have security or a record of previous success.
That is why entrepreneurs borrow from their homes to finance their spa if they can't get a loan.
This makes more sense than building a business on a deck of credit cards but the financial threats are still very serious.
You have to pay this money back whether your shop does well or not unless your family members are the outdoorsy type.
Still, it is a good source of relatively cheap money to get you started. Also the interest might be tax deductible (contact your accountant to make certain).
*Raid The Angels
An angel investor is a wealthy person who invests in new businesses for a share of the pie.
Angels are often the first financiers in a business who offer the basic capital to start and run it. Some angels may cut you a check and leave you alone to run your company. Others consider their investment an invitation to "help you" run it and make decisions.
If you do accept angel money make sure the terms are clear on both sides. Angel cash includes strings. Strings you may not want.
Make sure you know whether those strings are acceptable to you before getting in the money bed.
*Get Raided by Venture Capitalists
VC are to angel investors what great white sharks are to minnows. Venture capitalists have powerful jaws that can chew you up and spit you out if they feel like it.
Their money does not come with strings. However, it does feature handcuffs, leather, and a great deal of legal paperwork. VCs take the upper hand in any businesses they invest in and do not apologize for being bullies. That is the cost to get access to their substantial cash.
If your spa reaches the level that VC money comes a knockin, don't leap at the first lure they drag past your eyes.
If one shark likes your concept, others will also. Pitch to as many VC firms as possible then try to find the least shady offer before you accept the check.
The Bottom Line
No matter how you finance your company, be smart with the cash. Don't buy 15 LCD screens and 8 top-of-the-line tables if you are just starting out.
Have a clear path drawn out that tells you how the cash will be used, and more important, how it will be repaid.
Last point: the more you can figure out how to run your business without borrowing money, the more successful your business will be in the end.
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Lilly Cook is a seasoned Accountant, Licensed Esthetician and owners of two Spa & Wellness Illinois businesses.