The Value in Buying an Established Business
Starting a new business isn’t easy. We all know the stats – 80% of businesses fail in the first 5 years. It has some distinct disadvantages…you need a good idea, you need to build a customer base from scratch, market the business, hire staff and establish cash flow…all without a track record or reputation…which can make getting finance for the business very difficult.
If instead you buy an established business, you are taking over an operation that’s already generating cash flow and profits – it is a proven concept. You have an established customer base, a reputation and employees who are already familiar with all aspects of the business. You don’t have to reinvent the wheel – such as setting up new procedures, systems, and policies—since a successful formula for running the business has already been put in place.
On the downside, buying a business is often more costly than starting from scratch. However, it’s usually easier to get finance to purchase an existing business than to start a new one. Bankers and investors generally feel more comfortable dealing with a business that already has a proven track record.
Of course, there’s no such thing as a sure thing—and buying an existing business is no exception. If you’re not careful, you could get stuck with obsolete inventory, uncooperative employees or outdated distribution methods.
Whether you’re buying a business or starting your own, it’s crucial to have sufficient cash flow to run and grow the business.
When looking to buy an established business here are some things to look out for:
1. Look in an industry you’re familiar with and understand. Think long and hard about the types of businesses you are interested in and which are the best matches with your skills and experience. Also consider the size of business you’re looking for, in terms of employees, number of locations and sales.
2. Pinpoint the geographical area where you want to own a business. Assess the labor pool and costs of doing business in that area to make sure they’re acceptable to you.
3. Once you’ve chosen a region and an industry, investigate every business in the area that meets your requirements. Just because a business isn’t listed doesn’t mean it isn’t for sale. Talk to business owners in the industry; many of them might not have their businesses up for sale but would consider selling if you made them an offer. Put your networking abilities and business contacts to use, and you’re likely to hear of other businesses that might be good prospects.
4. When purchasing an existing business, you’ll definitely want to put together an “acquisition team”—your finance broker, accountant and lawyer—to help you. These advisors are essential to what is called “due diligence,” which means reviewing and verifying all the relevant information about the business you’re considering. When due diligence is done, you’ll know just what you’re buying and from whom.
The preliminary analysis starts with some basic questions. Why is this business for sale? What’s the general perception of the industry and the particular business, and what’s the outlook for the future? Does—or can—the business control enough market share to stay profitable? Are the raw materials needed in abundant supply? How have the company’s product or service lines changed over time?
You also need to assess the company’s reputation and the strength of its business relationships. Talk to existing customers, suppliers and vendors about their relationships with the business. Contact industry associations, and licensing and credit-reporting agencies to make sure there are no complaints against the business.
While you and your accountant review key financial ratios and performance figures, you and your lawyer should investigate the business’s legal status and review a range of matters including all major contracts, pending lawsuits, labour disputes, guarantees, potential zoning changes, new or proposed industry regulations or restrictions, and intellectual property assets; all these factors can seriously affect your business.