A recent Reddit discussion about E-2 visas raised a question we frequently hear from prospective investors: Is it better to purchase an existing business or start one from scratch?
For many investors, buying an established company seems like the safer option. The business already has customers, employees, equipment and, hopefully, a history of generating revenue. Unlike a startup, there’s an existing operation to evaluate.
But here’s something we’ve learned after preparing thousands of immigration business plans: An established business isn’t necessarily a healthy business.
And when you’re investing your money in a company that will also support your E-2 visa application, understanding what you’re buying becomes particularly important.
The Business Is Generating Good Revenue. Isn’t That a Good Sign?
Imagine an investor considering the purchase of an established beauty salon.
The seller is asking $250,000. The salon generates $500,000 in annual revenue, has several employees, and has operated in the same location for years.
At first glance, it looks like an attractive opportunity. The business is already operating, and the investor won’t have to build a customer base from scratch.
But revenue doesn’t tell the whole story.
What if the salon generates $500,000 in sales but spends $490,000 running the business?
What if the current owner works 60 hours a week without paying herself a market-rate salary?
Or what if several employees are independent contractors who could leave after the acquisition, taking their customers with them?
Suddenly, the business may look very different.
These are the types of questions investors should investigate before committing to an acquisition.
What Are You Actually Buying?
When evaluating an existing business, we encourage investors to look beyond the asking price and annual revenue.
The financial statements deserve particular attention.
How profitable has the business been over the past several years? Are revenues growing, declining or remaining relatively stable? Are operating expenses consistent with industry benchmarks?
It’s also important to understand whether the seller’s reported profits accurately reflect the cost of operating the company under new ownership.
For example, if the current owner performs management duties without receiving a salary, the buyer may need to hire someone to perform those responsibilities.
That expense could significantly change the company’s profitability.
Similarly, a business may report strong earnings while facing substantial upcoming expenses for equipment replacement, facility improvements or lease renewal.
A buyer needs to understand these obligations before determining whether the purchase price makes financial sense.
The Employees and Customers Matter, Too
An established business may have an existing workforce and customer base, but neither should be taken for granted.
Consider the salon in our example.
What happens if two experienced stylists leave shortly after the acquisition?
Will their customers remain with the salon, or will they follow the stylists?
What if the current owner has personal relationships with many of the salon’s most valuable customers?
And what if the lease expires in six months, with no guarantee that the landlord will renew it on similar terms?
These are ordinary business risks, but they can have significant consequences for an investor who is counting on the company to generate sufficient revenue to support ongoing operations.
They also affect the assumptions used in the business plan.
If the buyer expects to maintain existing revenue, there should be a reasonable basis for that expectation.
Can the Business Support the Investor’s E-2 Plans?
For an E-2 investor, there’s another important consideration.
The business must be more than an investment that provides a living for the investor and their family.
Under E-2 regulations, the enterprise cannot be marginal. In general, it must have the present or future capacity to generate more than enough income to provide a minimal living for the investor and their family, or make a significant economic contribution.
This is particularly relevant when purchasing a small business.
An investor might acquire a profitable operation that comfortably supports its current owner. But what happens when the new owner wants to expand, hire additional employees or take a more active managerial role?
Can the business afford those plans?
At Visa Business Plans, we examine historical financial performance alongside the investor’s proposed operational strategy.
We develop projections that account for anticipated expenses, staffing requirements, revenue opportunities and the working capital necessary to support the business.
The objective is to determine whether the investor’s plans are financially realistic and explain how the business is expected to operate under new ownership.
Don’t Forget the Money You’ll Need After Closing
Another mistake buyers sometimes make is focusing almost entirely on the purchase price.
Suppose an investor has $300,000 available and plans to spend $275,000 acquiring a business.
That leaves just $25,000 for everything that follows.
But what if the company needs new equipment, additional inventory, marketing or renovations?
What if sales temporarily decline during the ownership transition?
Or what if the business needs several months of working capital before it can comfortably support its expenses?
Purchasing an established company doesn’t eliminate the need for operating capital.
This is why a realistic business plan should consider both the acquisition and the financial resources necessary to sustain and develop the company afterward.
The amount of capital required will depend on the nature of the business, its financial condition and the investor’s plans.
Buying an Existing Business Can Be an Excellent Strategy
None of this means that starting a business is preferable to purchasing one.
An established company can offer meaningful advantages, including existing customers, employees, operating systems and financial history.
But those advantages need to be verified.
A business with strong revenue, reliable employees, healthy profit margins and manageable operating expenses may offer an attractive foundation for an E-2 investment.
On the other hand, a company with declining sales, questionable financial records or significant upcoming expenses may require considerably more capital and management attention than the purchase price suggests.
The important question isn’t simply whether the business already exists.
It’s whether the business you’re buying is financially sound and capable of supporting your plans for its future.
How Visa Business Plans Helps Investors
At Visa Business Plans, we assist clients at several stages of the process, whether they’re purchasing an existing business or establishing a new one.
For clients considering an acquisition, we analyze the company’s financial statements, bookkeeping records and supporting financial reports to understand its actual performance. We examine revenue, expenses, profitability and potential financial concerns, looking beyond the seller’s representations to help clients determine whether the business is as financially sound as it appears.
For entrepreneurs starting a business from scratch, we can assist with company registration, obtaining an Employer Identification Number (EIN) and related business formation and compliance requirements.
We then develop a comprehensive business plan supported by industry research, realistic financial projections and a detailed operational strategy. Our plans are prepared with the specific requirements of the E-2 visa in mind, including the need to demonstrate a viable enterprise, a credible investment strategy and the business’s capacity to operate beyond a marginal level.
Contact us today to get startedThe information provided in this blog is intended solely for informational purposes. While we strive to offer accurate and up-to-date content, it should not be considered legal advice. Immigration laws and regulations are subject to change, and individual circumstances can vary widely. For personalized guidance and legal advice regarding your specific immigration situation, we strongly recommend consulting with a qualified immigration attorney who can provide you with tailored assistance and ensure compliance with current laws and regulations.
Visa Business Plans is led by Marco Scanu, a certified coach from the University of Miami with a globally-based practice coaching Fortune 1000 company executives, entrepreneurs, as well as professionals in four different continents. Mr. Scanu advises clients on turnaround strategies and crisis management.
Mr. Scanu received a bachelor’s degree in Business Administration (Cum Laude) from the University of Florida and an MBA in Management from Bocconi University in Milan, Italy. Mr. Scanu was also a Visiting Scholar at Michigan State University under the prestigious H. Humphrey Fellowship (Fulbright program) with a focus on Entrepreneurship, Venture Capital, and high-growth enterprises.
At present, Mr. Scanu is the managing partner and CEO at Visa Business Plans, a Miami-based boutique consulting firm providing attorneys and investors with business planning services in the areas of U.S. and Canadian immigration, SBA loans, and others.
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