In many cases, buying an existing business can be a safer option than starting one – one with fewer risks and many benefits. Even then, the decision to hit the ground running should not be one that is made on a whim.
The clear first step is to identify your choice of industry, depending on your particular skills, your financial capabilities, and your interests. Once this decision has been made, it is best to keep an eye out and wait for the right business to be placed for sale. Do not be rushed into a choice, be it for any reason.
There are several things to consider when buying an existing business:
- Why is the previous owner selling the business?
- What are the assets and liabilities of the business?
- Is the business profitable? Does it have a sizeable customer base?
- What is the current reputation of the business? If it is bad, will you be able to build a positive reputation in a short while?
- Does the business have a future? Is there scope for expansion?
- Are all the paperwork and accounts in order?
There are several reasons why buying an existing business can be an appealing choice:
• The groundwork has already been done. You don’t have to worry about the initial start-up phase where there is too much work and too little cash flow. Hopefully, the business plans and procedures have already been finalised and working well.
• You will have an idea of the financial history and will have seen the financial statements, sales records, and other relevant documents. This means that you know what to expect, and what needs to be done.
• It might be easier to get financial backing since your business has an existing track record. If you can provide statements and figures backing you up, you might be able to get a better loan (if you are applying for one).
• You are entering an existing market, with existing customers and contacts. If your business has a good reputation, you can focus your attention on not only retaining your existing customers, but also attracting new ones and improving your market share.
• You can also expect immediate cash flow, since the start-up phase where you have to build infrastructure, stock, and employees has already been completed.
The most important thing to remember is that you get exactly what you pay for. The cheaper option might not always be the best one, if you are inheriting huge business problems and negative publicity.
There will be several businesses that are being sold because they are performing badly or are not profitable. While some consider it as a challenge to rebuild and develop a business that is performing badly, it is undoubtedly a risky venture.
Often, it can be easier to start a business from scratch than it is to erase someone else’s mistakes.
• If the business has been managed poorly, you can expect a lot of baggage, in the form of poor employee morale, negative publicity, and a dwindling customer base.
• If the business is very old, you will probably have loyal customers, but you might have to put in a lot of initial investment to improve the equipment and infrastructure. The same is true if the business is underperforming.
• If the previous business relationships, contacts, business brand, and customer impressions were largely negative, it can take quite some time and a lot of effort to turn it around.
• If the business has experienced rising competition, or is part of a declining industry, a change in leadership might prove fatal.
Hidden problems and issues that are not apparent from outside can often end up taking up most of your time. To avoid this, research the business thoroughly. Talk to the employees, existing customers and other businesses in the region to get an idea of the operation of the business. One possibility is to do some anonymous investigation with the help of friends or family.
If you take the time to evaluate the risks, go over everything in detail, and take the advice of your consultants, buying an existing business can be a great option.