5 Things You Need to Do If You're Buying a Business
If you’re ready to take the plunge into business ownership, your first thought was probably to start from scratch.
Most business owners start off thinking the same thing – they have a brilliant creative new idea and want to build it from the ground up.
While this may sound more appealing than buying someone else’s business, there are some pretty hefty advantages to picking up the reigns of an existing enterprise...
...and the truth is that buying a business just might be better than starting your own.
Why should I consider buying a business rather than starting my own?
I know what you might be thinking. “What could be better than my own idea, my own business, my own way of doing things?”
Did you know that somewhere between 65-90% of start-ups are no longer in existence after five years?
That’s a scary statistic.
I’m not saying that a little risk isn’t a good thing – and, there are certainly benefits to starting your own business with your own idea.
But there are also a lot of benefits to buying one that already exists.
Here are just some of the reasons why you might want to consider the alternative:
But there are also a lot of benefits to buying one that already exists.
1. The business is already making money.
If you buy a business that already exists, chances are that it’s currently generating cash (and let’s face it, you’d have to have a very good reason to buy one that isn’t!)
Most new businesses take a few years or more to start generating consistent income. During that time you’ll face a continuous stream of bills – your premises, to your stock and materials, to your staff and technology, it all mounts up – not to mention ongoing operating expenses like insurance, utilities, advertising…
Because of the initial outlay and the time it can take to build up a customer base, it’s nearly impossible to turn an immediate profit with new businesses.
But if you buy an established business, you’ll hit the ground running with an existing cash flow – and that’s be massive plus. What’s more, you’ll be able to invest that money (plus any extra capital you can raise) into growing your business, rather than sinking everything you have into start-up costs.
2. You have a ready-made customer base.
Most existing businesses come with some level of brand recognition, and hopefully a positive reputation and a loyal group of customers. While you can and should strive to grow and diversify your customer base and build your brand, you don’t need to start from the very bottom.
3. You can secure financing more easily.
Lenders are far more likely to support an existing business, with a proven track record, than to support one that’s unknown. After all, there’s less risk if a business has already proven its ability to generate income.
If you start your own business, you’ll need to develop a compelling business plan to demonstrate what your business will do and how it will make money. If you’re buying an existing business, the data already speaks for itself.
4. It’s quicker and less stressful than starting your own business.
Although there’s always going to be hard work involved in owning a business, buying one that already exists will be far less time-consuming than setting up your own.
The brutal fact is that the stress and grind of starting a business, even in a field you love, may quickly cause your passion to dwindle and your enthusiasm to fade. You may have less time for your family and the hobbies you love.
If you buy a business instead, it’s less likely to take over your entire life!
5. The business is already up and running.
If you start your own business, you’ll have to do a lot of difficult work to set up the everyday operations. You’ll need to train employees, implement new systems, generate policies – but with an established business, those things will already be in place. You won’t need to rely on trial and error until you figure out what works, because all that will have already been done for you.
6. If you already own a business, buying a competitor, supplier or customer can be a powerful shortcut to growth.
Find the right opportunity and you may be able to break into a new market or geographical area, broaden your service offering, or increase your capacity so you can service larger clients.
Ok, so that’s the ‘why’ – now for the ‘how’.
How do I buy an existing business?
Now you’re probably thinking. “I get why I should consider buying a business instead of starting one, but how do I go about it?”
Well, that’s why you’re reading this article. There are a number of steps you’ll need to make sure the purchase process will be plain sailing, and I’ve put together this handy checklist to help you follow them.
even though there’s less risk involved in buying an established business than in starting your own, you’ll still need to tread carefully, exercise caution and follow the correct procedures to make sure you get the business you want at a price it’s worth – with no nasty surprises.
There are five things you need to do to buy a business:
Start pursuing opportunities.
There are a number of ways to look for a business to buy.
You can simply use your network and ask around to find out who’s open to selling.
You could contact a broker or look for business listings on businesses for sale directories such as this one.
Or you could identify an ideal target and make an approach to see if they’d be willing to sell.
Whichever route you take, make sure you check out that the seller is legitimate before you proceed.
When buying a business, it’s crucial that you appoint qualified professionals to advise you along the way. These will probably include a banker, an accountant and a lawyer. Each of these people is indispensable to making sure that you negotiate a fair price for the business, follow all the right legal steps and understand precisely what it is you’re committing to.
You may also want to appoint a broker to guide you through the sale process, especially if you’re buying a business for the first time.
Due diligence means thoroughly reviewing all of the information about your target business before you buy. Your advisors are there to help you get this bit right.
They will have the expertise to coach you through the process, tell you what to look for, and help you spot any issues or potential pitfalls. There are lots of questions you should ask during the due diligence stage.
Here are some of them:
When you start your due diligence, you will probably need to sign an NDA (non-disclosure agreement) – this is a contract stating that you will not disclose any confidential information about the target business that you uncover as part of your due diligence process. This is a precaution to protect the seller in case you choose not to buy the business.
There are several documents you’ll need to review in the process of your due diligence:
Sales and marketing.
Every business needs sales, so you will want to understand everything about the businesses customers. Do they have plenty of customers? Or just a handful? Are the customers loyal? How do they attract new customers? What marketing is required to make the business work?
Legal contracts and agreements.
Many established businesses build up relationships with customers, suppliers, partners and lenders etc. Some of which they will have current commercial contracts & agreements with. It’s very important that you check the terms and conditions and expiry of these, as they may be vital to the success of the business.
Permits and Licenses.
Be sure that the business you are buying has all of the necessary permits and licenses to operate, and complies with all legal requirements for that type of business.
If the business you’re buying is registered it will have an ABN (Australian Business Number), you can check the ABN Lookup website to find out the ABN and some basic information including the legal organisation name, any business names, when it was registered and when it was registered for GST.
If it’s a company you should also carry out further business checks with ASIC. Watch the short 2 minute video below to find out more.
And download the ASIC business checks app for smartphones and tablets to carry out the checks.
Any regulations or zoning laws.
You need to be absolutely sure that the business is not violating any laws, such as infringements of environmental regulations or zoning laws.
The financial information.
Analysing the financial records is critical to understanding a businesses’ overall financial health and potential for profitability. You should look at the tax returns, profit and loss, balance sheet, sales records, accounts, and debt disclosures – and official financial statements if they exist.
Inventory and equipment status.
You’ll need to know what equipment is currently in use at the business, whether it is included in the sale, the quality and what condition it is in. And if it’s been fully paid or not. If not, you will need to take the debt and loans into consideration.
How you go about negotiating to buy a business will depend on whether or not you use a broker, and on what’s customary within that industry.
It’s a good idea to get a professional valuation, but unless your target is a listed business then any valuation is likely to be subjective and the seller may have their own, different valuation. These can at least form a useful starting place for negotiations.
One thing you can be sure of though – negotiations take time, and you’ll probably go through several rounds of discussions before you settle on a price. Whatever you decide to pay, you need to be comfortable that you can make a return on your investment.
Be sure to check the purchase agreement thoroughly to make sure everything you expect is included.
Your lawyer is there to help you with this – they’ll talk you through what you’re agreeing to and negotiate clauses in your favour – for example, you might want to make sure the seller doesn’t set up a competing business, or take key customers or staff with them when they exit the business.
These are the key steps to buying a business – but there’s a bit more to think about before you take the plunge.
Other things to think about
You want to buy a business that will succeed, right?
So, you shouldn’t just buy any business because it already exists. There are certain factors you need to consider before committing.
What sort of business do you actually want to buy?
To make a good go of a business you really should have a good understanding of the industry and how the business works. It should cater to your passions and your interests, and its goals (other than making money!) should align with your own.
For example, I don’t know anything about food, so it would be a bad idea for me to buy a restaurant. But if you’ve worked as a chef for a number of years and now want to run your own restaurant, buying one would be a logical move.
Where do you want to buy – and how big do you want to go?
How many employees do you feel you can manage? Where do you want your business to be located? How much will it cost you to operate a business there? Will there be heavy footfall to the business?
These are all questions you need to answer before you can start identifying target businesses.
What changes you would want to make?
Once you start looking at a specific business, think about what changes you’d want to make and how much they would cost.
For example, if you want to increase the size of the company, how much will it cost to manage more staff?
If you want to expand the services you offer, what expertise, equipment and technology would you need to deliver them?
How much time and effort would be involved in making those changes, and how much you are willing to invest?
Just like buying and renovating a home, the cost of transforming a business can end up being far higher than expected and there’s a big risk you could run out of budget, so if the business would need big changes to suit your needs, it might not be the ideal target after all.
Why is the existing business owner selling the business?
There are many reasons why a business owner might want to sell his or her business. It may simply be that they wish to relocate, or that they no longer want to dedicate the time and effort it takes to run a business. They might even want to retire.
Or, there could be a more sinister reason...
If the business is struggling in any way, you’ll need to know whether you’re in a position to overcome any obstacles that the owner could not. Be sure to ask what problems they’ve had, what steps they’ve taken to try and solve them, and what the outcome was.
If you feel you have the expertise to solve the issues that the current owner couldn't then you may be looking at an opportunity to get a great business at a discount price.
On the other hand, if the challenges look insurmountable, you might want to reconsider…
Look out for red flags.
Do you want to buy a business that’s destined to fail?
I’m pretty certain the answer to that is ‘No’.
To avoid buying a money pit, make sure you look out for these signs of trouble:
- The business is not gaining customers
- The business is falling far behind its competitors
- There is too much business debt
- The business plan is poorly thought out or is out of date
- There is no longer a strong market for the product or service
- The location is inconvenient and will not yield high traffic (depends on business type of course)
- The production costs are unsustainable
- The brand’s reputation has been tarnished
If you come across anything that doesn’t look right, get your advisors to help you dig deeper. If you’re not completely comfortable that the business is right for you, look elsewhere.
After all, this is a massive investment and there will always be other opportunities.
While it may seem more expensive to buy a business than to start one from scratch, when you buy one that’s already established, you’ll know exactly how much your investment will be (unlike a start-up, where you’ll never know what to expect).
What’s more, you’ll find it much easier to get finance to buy a business that already exists than to raise start-up capital.
Buying a successful business is also less risky than starting your own – although, of course, nothing is ever guaranteed. You’ll still need good judgment, business acumen and solid advice every step of the way.
If you’re still on the fence about whether buying a business is a shrewd business move, I’ll just mention a couple of little businesses you may have heard of.
This may come as a shock, but back in the day the founders of both of these global empires decided that it would be better to buy a business than start one from scratch.
Two of the biggest companies in the world were started in the very same way you could be about to start yours: by buying one.
So, what do you think – is it better to buy an existing business than to start your own?