Buying an established business rather than starting a new business can be a great option for many potential business owners. Established businesses come with an existing customer base, brand, assets, employees and cash flow. There is also the risk that you may purchase any issues that the business has. To mitigate this, you should be clear on what it takes to run the business you are considering, and complete your due diligence prior to finalizing the purchase.
Buying a business can be a time-consuming and complex process. You will need to examine in detail the business you plan to purchase, ensuring you understand its financial position, current position in the market, structure, and how you will want to run the business.
You will need to review all business records, plans, procedures, and acquaint yourself with the competitors and the industry the business operates in. You will also need to confirm that appropriate licences, permits and registrations are in-place and determine which ones can be transferred to a new owner.
Buying a business is a serious investment. You should always seek professional legal and financial advice before signing any documents.
Buying an existing business is on the whole less risky than starting your own business, especially if you can buy a well-managed, profitable business for the right price. Consider these advantages:
- The business is already providing products/services to the market and is a known quantity to customers.
- Immediate cash flow from existing operations.
- The business should have plans and procedures in place that you can follow or adapt vs. creating from fresh.
- Existing financial history, which can be used to forecast and can make it easier to secure loans and/or attract investors.
- Existing employees with experience in the business can provide assistance and help, especially as you learn how to run the business.
- You will acquire existing suppliers, employees, assets (plant, equipment and stock), customers, and the brand.
- Many sellers are willing to negotiate a transition period where they can train you on how to run the business and help you establish relationships with customers, suppliers and staff.
Not every business that is for sale is a good prospect. It is possible that the existing owner(s) are selling due to a lack of profitability, under-performance or other issues with the business. While this may be an opportunity to buy a business below what it could be worth, it can also come with significant risks.
- External factors, such as a declining industry, increased competition or increased overhead may be impacting profitability.
- The business may be poorly managed with low staff morale, located in an undesirable location or suffer from a poor reputation.
- Major investment may be needed to update and/or replace existing plant or other fixed assets.
- Financial and business record keeping may not be up-to-date making it difficult to understand how the business is currently operating.
- The seller's established relationships may be a major factor for the success of the business.
- Under-performing businesses can require a lot of investment to make them profitable and may have hidden costs that are not immediately clear at time of sale.