How-To Buy An Existing Business: Business Incubators

Nest in one of these entrepreneurial hotbeds, and you may just be on your way to financing.

What It Is: Business incubators are a good path to capital from angel investors, state governments, economic-development coalitions and other investors. Business incubators house several businesses under one roof or in a campus setting, and offer resident companies reduced rents, shared services and, in many instances, formal or informal access financing.

Appropriate for: Pre-revenue-stage companies to early-stage companies that are selling products or services

Supply: Approximately 1,000 incubators in North America cater to high- and low-tech businesses. Of these, about 80 percent report that they provide formal or informal access to capital.

Best Use: Many types of financing may be found through incubators, which may or may not be appropriate for your business. Generally speaking, however, incubators and the kinds of investors they lead a path to work best for companies at the earliest stages of their development.

Cost: There may be many kinds of financing found through incubators, from state-assistance funds based on matching private sector investments, which could be inexpensive, to straight equity investments from angel investors, which could be very expensive.

Ease of Acquisition: Getting into an incubator can be easy or challenging. Simply being in an incubator offers value to investors. Incubator managers know this, and as a result, many carefully screen would-be tenants to see that they match certain criteria. The good news is that once in an incubator, the path to angels or other investors might be more direct since they tend to hover around easily identified centers of entrepreneurial activity.

Range of Funds Typically Available: $25,000 and greater, though some incubation programs offer microloans as small as $500.

First Steps
The roots of business incubation go back about 40 years, to a time when, not surprisingly, the industrial landscape was changing in fundamental ways.

It all started when heavy equipment manufacturer Massey Ferguson pulled out of Batavia, New York, in 1959, leaving behind a hulking 850,000-square-foot facility. This catastrophic economic event seemed like the end of the line for the town. As it turned out, it was only the beginning, not just for Batavia, but for a new generation of emerging companies that would change the composition of the American economy.

After the ax fell in Batavia, local resident Joe Manucuso bought the building the company left behind. He hoped to use it to bring new businesses and new jobs to the area. His idea was right for the times and caught on rapidly, as businesses (including an actual incubator, hence the name) attracted by cheap rents, flexible space and shared services, filled the building. “Today,” says Dinah Adkins, executive director of the National Business Incubation Association (NBIA), “business incubators offer comprehensive support to fledgling businesses.”

But the other important benefit that business incubators often provide is access to the kind of early-stage capital that emerging companies need. For instance, according to Adkins, surveys of NBIA members reveal that about 80 percent of incubator owners and directors provide formal or informal access to seed capital. For example, 77 percent of incubator owners help clients access commercial bank loans, 74 percent help clients access specialized noncommercial loan funds and/or loan guarantee programs, and 61 percent link clients to angel or venture capital investors.

Adkins says it should not surprise anyone that angel investors tend to hover over business incubators. First, she says, almost all “client companies,” as they are called, are carefully prescreened for acceptance. “The fact that a business has been accepted into an incubator,” Adkins notes, “offers due diligence value to potential investors. In a way they have already passed an important litmus test by simply being there.”

Incubators attract sources of capital because of the simple economics of convenience. Rather than searching high and low for potential deals, investors can easily find a multitude of investment opportunities under one roof.

Finally, the businesses an investor is likely to find inside an incubator can make whatever dollars he or she is prepared to invest go much further. Says Adkins, “With low rents, shared services and access to professional services and training at low and sometimes no cost, investors can gain a real sense of comfort that their investment will last longer and take the business farther than might be true within a conventional business environment.”

To find a business incubator in your area, visit the National Business Incubation Association.

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