The Advantages and Disadvantages to Buying a Business Before the End of the Year
Timing is key to a lot of aspects of business.
When you’re making a sale, sometimes, you need to be in the right place at the right time to help a potential customer.
When you’re capitalizing on a business investment opportunity, being in the right place at the right time can mean the difference between getting a good price and overpaying.
With the end of 2020 approaching quickly, now is a pertinent time to discuss the advantages and disadvantages of another potential investment – buying a business.
Does it pay to buy a business before the end of a year? Or does it pay to be patient and wait it out?
Advantages of Buying Before the End of the Year
There are a few ways you could benefit by purchasing a business from the end of the year. First and foremost, the earlier you buy a business, the more time you have to rake in the revenue. For every month you delay your purchase of the business, that’s another month that you won’t be benefitting from the revenue.
Depending on the type of business you’re purchasing, the fourth quarter could be crucial to your success. For example, retail businesses typically experience a huge uptick in sales in the final few weeks of the year, starting with Black Friday.
According to the National Retail Federation, 19% of annual retail sales over the last five years have occurred in November and December alone. So, if you’re purchasing a retail business, there are plenty of advantages to taking over before these holiday sales pass you by.
There are also potential tax advantages of purchasing a business before the end of the year. Just like any other business, you could get tax deductions for purchasing equipment and making other investments. And when you purchase a new business, you’ll often have many investments to make.
Taking advantage of these tax benefits could be a huge boon to the future of your business. Getting an almost immediate return on your investments in the form of tax deductions can be significant, depending on the type and amount of your investments.
Disadvantages of Buying Before the End of the Year
While the benefits of purchasing a business before the end of the year are significant, there are downsides, too.
If you’re not purchasing a retail business, there is no significant trend in spending that would influence you to accelerate your purchase. In fact, in many business-to-business industries, the end of the year and the beginning of the year are often much slower times for sales.
That’s because companies often prepare budgets for the following year starting in the last few months of the year before. And during that budgeting process, companies often halt their spending. Purchasing a business can be challenging enough as it is. Having your first few months in business be a traditionally slow time for sales could force you to invest more money than you want so early on.
At the same time, purchasing a business before the end of the year might not give you ample time to conduct thorough budgeting and analysis. That could result in you “flying by the seat of your pants” for a large part of your first year in business. As most business owners will tell you, the first year is one of the most important to your long-term success.
By waiting until the calendar flips to a new year, you’ll be able to assume the budget the previous owner prepared. Then, you can take your time throughout that first year to analyze the shortcomings and good ideas the previous owner built into the budget. In other words, delaying your purchase would give you the advantage of time, without the pressure of having to build a budget before you truly know what you’re dealing with.
The potential tax deductions for purchasing a business before the end of the year are significant. However, they only apply if you are actually able to make purchases that would qualify for tax deductions.
Some business owners might think that all business investments would qualify, but that’s not true. It’s important to integrate tax planning when considering purchases and deductions.
As with most business planning, that takes time, and it sometimes takes outside counsel. If you don’t already have a trusted advisor on your staff or on contract, it could be quite the rush to try to get that done before the end of the year. This could end up costing you significantly if you make investments you think will qualify for tax deductions, only to find out they don’t.
Whether buying a business before the end of the year is advantageous to you or not depends on a number of factors. If you’re trying to make a decision, consider:
- The type of business you’re buying
- The industry the business is in
- The normal sales cycle
- How important budgeting is
- Potential tax deductions
Once you’ve weighed all these things, you’ll be able to make a smart decision about how to time the purchase of your new business.
Sunbelt South Florida brokers can help you make the right decision!
Sunbelt Business Brokers of West Palm Beach provides dedicated business brokerage services for all of your selling needs. Whether you are an established business owner nearing retirement and looking to sell, or an ambitious entrepreneur seeking your next investment opportunity, there is no reason to look beyond Sunbelt Business Brokers. Visit us at 800 Village Square Crossing
Suite 216 Palm Beach Gardens, FL 33410 or contact us at (561) 832-9222.