Buying an existing business can be a shortcut to professional success - however, it's important that you do your due diligence in order to avoid disaster.
When properly executed, buying an existing business that is already established means immediate cash flow. The business will have a financial history, which gives you an idea of what to expect, which in turn can make it easier to secure loans and attract investors. Buying an existing business means that you will acquire existing customers, contacts, goodwill, suppliers, staff, plant, equipment and stock.
However, it’s important that you do the proper research before committing to purchasing an established brand, as failure to do so could result in you being stuck with a “lemon” and significant financial hardship - so what factors should you be considering?
The Pro’s And Con’s Of Buying An Existing Business
Buying a business is usually considered to be less risky than starting your own business, especially if you can buy a well-managed, profitable business for the right price. However, it’s important to keep in mind that not every business on the market is a good prospect, as many owners could be selling unprofitable or under-performing businesses. As a buyer, it’s your job to distinguish the difference prior to a purchase, and understanding the risks involved.
Pros
The difficult start-up period and workload involved has already been done, and the business should have “well oiled” plans, policies and procedures in place.
Buying a well established business should translate to immediate cash flow.
The business will have a financial history, which gives you an idea of what to expect and can make it easier to secure loans and attract investors.
You will acquire existing customers, contacts, goodwill, suppliers, staff, plant, equipment and stock.
A market for your product or service should already be established.
Existing employees and managers should ideally have a wealth of experience they can share with both you and other new staff members.
Cons
The business might need major improvements or upgrades to old equipment.
Buyers often need to invest a large amount up front, and will also have to budget for professional fees required for solicitors and accountants.
The business may be poorly located, badly managed, or have low staff morale and company culture.
External factors, such as increasing competition or a declining industry, could potentially affect future growth.
Under-performing businesses can require a lot of investment in order to make them profitable in the long term.
The seller's personality and their established relationships may be a major factor for the success of the business - good or bad.
What To Look For When Buying An Existing Business
Buying an existing business is a complex and time-consuming process. You will need to investigate in great detail the business you plan to buy, making sure it is feasible and has a well-developed market for its products or services. Buyers will also have to check business records, plans and operations, and familiarise themselves with their future competitors and the industry. It’s also their responsibility to check that the business has the appropriate licences, permits and registrations and find out which ones can be transferred upon sale. Basically? It’s a big investment, and due diligence is required in order to minimise risk exposure.
To conduct the appropriate due diligence required for buying an existing business, potential buyers will need to carefully review:
Income statements
Records of accounts receivable and payable
Balance sheets and tax returns including business activity statements (last 3-5 years)
Profit and loss records (last 2-3 years)
Cash deposit and payment records, as reconciled with the accounts
Utility accounts
Bank loans and lines or letters of credit
Minutes of directors' meetings/management meetings
Audit work paper files (if available)
The seller's claims about their business (e.g. their reasons for selling, the business's reputation)
Privacy details (e.g. of employees, trading partners, customers)
stock
Details about plant, equipment, fixtures, vehicles (are they in good working order and licensed?)
Intellectual assets of the business (e.g. intellectual property, trademarks, patents)
Existing contracts with clients/staff
Partnership agreements
Lease arrangements
Details of the business's automated financial systems
Details of credit and historical searches related to the business.