The question at this point is: would you be better off starting the same business from scratch? Of course you will not earn $250K in the first year or probably the second and most likely not even in the third.
As an exercise we will look at a financial comparison that should help you determine if you should buy an established business or start the same business from inception on your own.
The established business will cost you $1,250,000. This number is made up of $250,000 in tangible assets that include inventory, office furniture, computers and vehicles, and $1,000,000 in goodwill. At the end of 4 years you will have earned back the $1,000,000 that you paid in goodwill and have the $250,000 in hard assets and own a business that still has a goodwill value of $1,000,000.
For this exercise we will assume you have the $1,250,000 in your bank and we will not take depreciation and amortization into account.
Your bank account |
$ 1,250,000 |
The 1st year you make |
$ 250,000 |
Value of Business |
$ 1,250,000 |
Net Worth after the 4 years |
$ 2,250,000 |
Starting your own business will require that you invest $250,000 to acquire the hard assets that were previously identified in the established business.
Your bank account |
$ 1,250,000 |
The 1st year you make |
$ 0 |
Value of Business |
$ 450,000 |
Net Worth after the 4 years |
$ 1,525,000 |
If you had bought the business your net worth at the end of 4 years would be $2,250,000, the profit you made of $1M (4 x $250K) plus the value of the business (goodwill) that is still $1M plus the value of the assets $250K. If you started the business from inception your net worth at the end of 4 years would be $1,525,000. Hence, based on the aforementioned exercise you would be far better off to have bought the established business instead of starting one on your own.
If however you had acquired the business based on the profit it had in the year prior to acquisition and the business did not perform as advertised or had in fact been set-up for sale, the scenario could look much more like this.
Your bank account |
$ 1,250,000 |
The 1st year you make |
$ 100,000 |
Value of Business |
$ 650,000 |
Net Worth after the 4 years |
$ 1,150,000 |