Buying a business

by Admin
Updated: June 30, 2018

Buying a business that is already established can provide advantages over starting from scratch

Building a business from the ground up can take years of hard work and, while much can be gained from attempting this at least once, there are strategic benefits from acquiring existing businesses that should not be ignored.

Buying an established business may sometimes simply be a good investment, but in my opinion it’s most rewarding as part of an ongoing strategy related to the business you’re already in.

The advantages of buying an existing business

Here are some of the main benefits that buying an existing business can provide:

  1. Investment: Sell the business later for a profit greater than the return you’d otherwise get on your capital.
  2. Income: Earn ongoing income greater than the return you’d otherwise get on your capital.
  3. Proven: If the business has been established and profitable for a few years it may be a less risky proposition than starting something from scratch.
  4. Acquire: Obtain things you cannot create (location, technology, intellectual property etc).
  5. Consolidation: Buy a competitor to make your business stronger and more efficient.
  6. Reduce costs: Make an existing business (or lifestyle) more profitable by buying a supplier or distributor.
  7. Launch pad: You may have a new or enhanced product or service dependent on existing infrastructures that it would be pointless to recreate.
  8. Save time: Get your product or service to market more quickly (market reasons, not laziness).
  9. Leverage: It may be easier to get financing for an existing business than a startup.

Know what you are doing

It is possible, and may even be a popular idea, that buying a business is a shortcut to getting started in business but this is unsound.

It’s important/vital that you already know how to run a business and have good knowledge of the business you’re considering buying before committing.

Find a business to buy

I am very suspicious of businesses being advertised for sale. Any solid business will surely be of interest to people who already know about it. It can also be dangerous to let people know you’re looking to buy a business. Your negotiating power will be greater if your involvement remains private. I recommend:

  • Keep a constant eye on your marketplace so you can spot opportunities as soon as they arise
  • Include a limited number of trusted people in your team
  • Don’t be led - drive the process yourself

Be the person a seller prefers to sell to.

Be clear about what you are buying

Some aspects of a business and are easier to quantify than others:

  1. Easy: Things that have broad appeal and could possibly be sold quickly such as real estate, fixed assets, inventory etc.
  2. Tricky: Things that have specialist appeal but could still be sold in reasonable time such as technology, rights etc.
  3. Difficult: Potentially volatile things such as existing customers, key personnel, ongoing research etc.

Whether or not you plan on working in the business yourself, how strong is it on its own? If things have been going wrong, be sure you know what they are. Be very careful regarding liabilities.

Decide how much to pay

While it is necessary to get expert opinions where appropriate, it is important that you are able to value everything yourself: I strongly recommend starting with a blank spreadsheet, putting in your own numbers and then cross-checking with the financial statements and valuations provided by others.

Assess all assets at a discount according to your level of confidence in their value, especially receivables: Depending on the industry, invoices that have been outstanding for a long time might be impossible to collect.

Ideally, pay only for the value of the assets and get the business for free. Mostly, however, you will have to pay something for the goodwill of the business.

Goodwill can be estimated in terms of perception, past profits or turnover (on the basis that future profits are up to the new owner) but the figure that matters most is your return on investment as calculated by you.

Financing

Apart from the obvious methods (cash, loans etc), I consider seller financing to be one of the most important especially if you can get the seller to agree to be paid on the basis of profits.

Caveat emptor

  • Why is the business being sold?
  • Are there any problems with customer relationships?
  • Have there been any dramatic changes in the last few years? An old trick is to cut back on advertising in order to make the business seem profitable which, of course, can be expected to negatively impact future performance.
  • Are there any dramatic (expensive) changes coming up? Compliance, insurance etc.
  • Don’t be lazy: Double-check everything yourself.
  • Beware of delays in obtaining data.
  • Be careful not to overestimate future success.
  • Can you protect against departing personnel causing problems? Non-compete provisions etc.
  • Make sure everything you think you are buying is actually in the contract!

More info

Sound basic advice from sba.gov and fitsmallbusiness.com.

“Forget Startups - Just Buy A Small Business From A Retiring Entrepreneur” from fastcompany.com (“Droves of baby boomer business owners are starting to retire, and looking to hand off their life’s work. That spells opportunity.”).

A very sensible, “Buying a Business: Due Diligence Checklist” from smallbusiness.findlaw.com.

Internal links

Loss leading Business memory Choose your customers Go to Articles
Agree? Disagree? Questions? Answers?
Please post a comment...
Log in