Things to consider when buying an existing business
You might find that you are in a position to start a new
business but don’t want to take the risk in starting a business
from scratch. There are many advantages of buying a company that’s
already been established, however don’t be fooled into thinking
that it’s going to be a walk in the park. There is a lot to
consider when buying an existing business.
Many small business owners have been driven to entrepreneurship
after being made redundant; a study released last year from
Specialist Insurer Hiscox revealed that 17% of small businesses
were started up after one or more of their owners were made
redundant1. A poll conducted by professional networking
site LinkedIn found that 48% of respondents said that they would
set up their own businesses with the lump sum they received from
redundancy2.
So if you have some capital buying an existing business could
make good business sense. It just takes some investigating.
Advantages
- As the business is already established it may be easier to
obtain further financing as the business has a proven track
record.
- Existing businesses already have established customers and
reputation to build from.
- You can gain support from the previous owners and trade from
their goodwill
- The business plan and marketing model have already been tried
and tested
- Initial start-up teething problems should have already been
tacked and solved
- The existing workforce have experience you can capitalise
on
- Even if the company wasn’t profitable in the past it has the
chance of profitability in the future under new management
- You might be able to buy the business at a discounted price,
circumstances may have forced the current owner to sell quickly for
less than its worth.
Disadvantages
- Buying an existing business can be an expensive ordeal as you
also have to consider the fees for Solicitors, Business brokers,
Accountants, Commercial surveyors etc
- The business may need a substantial injection of capital if
it’s been neglected or badly managed to give it a fighting chance
of succeeding.
- You may need to honour all existing contracts or attempt to
renegotiate any outstanding contracts left in place by the previous
owners
- You may inherit an unhappy inefficient workforce
Considerations
The most important consideration of buying an existing business
is valuing that business. There are several methods of valuing that
can be used, so it’s best to seek help from your accountant at this
stage as well as a Business Broker or Transfer agent.
You should do a thorough investigation into its past activities
and operations as well as investigate its current business status,
financial status, its standing in the market and its competition
and whether it has any potential for the future. Don’t exclude
finding out exactly why it’s being sold in the first place. A lot
of information needs to be gathered in order to make an informed
decision; talk to the vendor as well as its existing and previous
customers and suppliers.
The hardest things to evaluate are the business’ intangible
assets which can include the company’s reputation, relationship
with suppliers, value of goodwill and whether or not it has patents
or intellectual property.
Other considerations include
- Stock
- Assets
- Products
- Debtors
- Creditors
- Suppliers
- Employees
- Competition
Look into all the other considerations carefully, for example,
did the owner personally guarantee the lease for the premises? By
speaking to the landlord you’ll then ascertain whether you are also
expected to personally guarantee the lease.
Once all these factors have been investigated, assessed and
considered you’ll be in a better position to know how much you
value the business at and what you want to offer to purchase the
business. If this offer is accepted by the seller, there is still a
period of time allowed called due diligence, which gives you the
time to make all the necessary checks so you can confirm that all
the information that you, your Business broker and Accountant have
collected is correct and accurate. It gives you the time to make
sure you aren’t buying something that wasn’t what you actually
thought it was. Your due diligence process could take as much as 4
weeks so do ask the seller to take the business off the market
during this exclusivity period, and don’t be surprised if the
seller asks you for a down payment of some sort to secure this.
After your full investigation has been done you still have an
opportunity to negotiate and then move through to full completion.
Once you have fully completed and bought your new business you must
immediately get a business insurance policy and employers’
liability to immediately protect your new investment and staff.
1http://www.inspiresme.co.uk/news/starting-up/entrepreneurs-driven-by-redundancy/
2http://www.morethanbusiness.com/Knowledge-Centre/Business-News/2009-04-02/Half-of-professionals-would-use-redundancy-package-to-launch-start-up/1016
