Want to be your own boss? Do this first
There generally are two ways to becoming a small business owner:
You could buy an existing company, with its established customer base, stable of trained employees and proven cash flow.
Or you could start a company from scratch and bootstrap it - hopefully to success.
Starting from scratch may be best for the entrepreneur with a groundbreaking idea. On the other hand, those who aspire to make their own hours or seek more immediate cash flow may be better off taking over an established business, said Patrick Snyder, executive director of the United States Association for Small Business and Entrepreneurship, which fosters, teaches and researches entrepreneurship.
"Buying a successful, existing business with proven cash flow and revenue history is almost always going to have a higher chance of success than starting from scratch," said Bob House, general manager of BizBuySell.com and BizQuest.com, which together feature 76,000 business listings for sale.
"If you do have something that's totally novel, the question to ask yourself is what pieces are necessary to build that? You might find a business that has some of those qualities and you could pivot them to [meet your goals], but there are plenty of examples where if it's a new model and no one's created it before, then you may have to go the startup route."
Buying an existing business, or an existing business' assets, can also work when that business has something you need to run more smoothly, said Alan Pinck of A. Pinck & Associates and volunteer for SCORE, the Small Business Administration's free mentorship program.
For example, one of Pinck's clients bought a falafel restaurant because it had a valuable lease in the right location, even though he closed it and reopened as a lobster roll eatery.
Pinck himself purchased a client list from a competitor that was closing so that he could get a head start on his own tax consultancy,
Meanwhile, interest in owning businesses of all types is up.
Small business activity in the U.S. rose in all states except Tennessee in 2015, according to entrepreneurship research by The Kauffman Foundation. It also found that entrepreneurial activity increased by the largest year-over-year amount in two decades in 2015.
Jake Emen was working part-time as a Washington, D.C.-based online marketing professional when he began editing for the website ProBoxing-Fans.com. After spending a year building its traffic and profitability, with an eye on becoming self-employed, he opted to buy and build on ProBoxing-Fans.com's existing infrastructure.
"While I knew I could start my own boxing site from scratch I knew that I would just be competing with what I had just spent time building," he said, noting that he was purchasing built-in advertising revenue, sponsorships and web traffic for about 10 times its proven monthly income.
"The purchase of a business should fulfill a strategic goal or strategy," said David Lopez, who started his fast casual smoothie and sandwich concept, Froots, 16 years ago and along the way bought competing businesses to merge with it.
He's since started and bought several companies, including several dental offices and a dental repair operation called Dental Fix RX.
"For me, it's consolidating cash flow or vertical or horizontal integration [with my existing companies]. That's the only reason I would buy a company."
Financing a business acquisition can be easier because of the company's documented financial history and assets, said Jay DesMarteau, head of small business banking for TD Bank, though a lender would also evaluate the buyer's qualifications to operate the business and whether the company's success is dependent on the seller's involvement. Business buyers might also take advantage of seller-held financing, which may have more flexible terms.
Startup businesses present more unknowns – will people buy the product? Can you attract the right employees? Are you prepared to work without pay for a while?
"The majority of businesses fail during the first year," DesMarteau said, and since startup businesses don't yet have revenue or income, lenders might consider an entrepreneur for a SBA-backed loan based on their personal financial history, capital reserves and possibly a guarantee of home equity or other assets.
"A good way to get closer to 'yes' is to show a bank or lender your ability to repay large debts such as a mortgage, financial records including tax statements and proof of income. It's also important to have a well-formed business plan that outlines business goals for the next three to five years," he said.
No matter the path to business ownership, an owner must evaluate whether they have the temperament for the job.
"Someone who wants to go into business needs to remember you can't foresee everything...if they have six months of business operating expenses and six months of personal expenses they'll make it a month and half. Someone who has drive and patience to make it happen will make it in business," Pinck said.