If you have decided to buy an existing business, you will need to put time and effort into finding the business that's right for you. Also, the costs involved in buying an existing business can be substantial and should not be underestimated.
If you get it right, there are many good reasons why buying an existing business makes good business sense. Remember though, that you will be taking on the legacy of the previous business owner; you need to be aware of every aspect of the business you're about to buy.
The content of this BizConnect guide takes you through the pros and cons of buying an existing business.
Why buy an existing business?
There is always a debate about whether it’s better to start a business of your own or rather purchase an existing business. Quite simply, your chances of success may be higher when you buy a business that is actively trading and operating.
With a new business you have to develop the product or service, determine what people are willing to pay you for it and start from scratch on pretty much everything. This is not to say that buying an existing business is going to be a breeze. There is much work to be done before you can call yourself a business owner.
One benefit of buying a business is that regardless of a company's past performance, an existing business will have a history from which you will be able to make certain decisions. Even if the company was not profitable in the past, you may have the skills and talents to turn it into a viable venture. Plus, you will be able to ascertain what the company did in the past that resulted in the current status of the operation and turn it around.
To make sure you buy the right business, you will need to do a thorough investigation of its past activities, its operations, its current status, the competition, the industry and its future potential. It’s important to have the right skills in order to turn a business around so this is something to consider, especially since each business is unique. It’s also never a bad idea to consult an expert on the status of the business before making a final decision.
Character traits required to buy a business
The skills and personality traits needed to start a new small business and make it successful are different from the skills necessary to take over an existing business and grow it. It also requires a completely different mindset. Buying a business is a better option for you if:
- You're someone who isn't passionate about the initial start-up stage of a company
- You enjoy increasing a company’s revenue and profits instead of building a business up from nothing
- Your management capabilities and organisational skills are strong
- You have the ability to consolidate more and experiment less
- You’re a hard worker
- You have the ability to make predictions based on past results and trends
Pros and cons of buying an existing business
- The groundwork to get the business up and running will have been done
- Problems and issues that may arise at start-up phase will probably have been addressed and rectified
- It may be easier to obtain finance as the business will have a proven track record
- There will be a demonstrated market for the product or service
- There may be established customers, a reliable income, a reputation to capitalise and build on and a useful network of contacts
- A business plan and marketing method should already be in place
- Existing employees will have experience you can draw on
- Many of the problems will have been discovered and already solved.
- You may need to invest a large amount up front
- You may have to budget for lawyers' and accountants' fees
- You may need several months' worth of working capital to assist with cash flow
- If the business has been neglected you may need to invest cash in fixing it
- You may need to honour or renegotiate existing contracts agreed to by the previous owner
- Staff may not be happy with a new boss, or the business might have been run badly and staff morale may be low.
Buying a business vs a franchise
So if you know that buying a business is definitely for you then you might be wondering whether you should invest in a business opportunity or a franchise. Here are a few things to consider:
- Franchise owners tend to be less independent than individual business owners in the sense that they don’t have as much freedom. Having the freedom to change up your offering is an example of this. Franchisees do however enjoy more security due to their products and/or services being thoroughly researched and tested for their market
- Once you purchase a business for sale you‘ll need to put in the hours to make it work, sometimes this requires learning new skills along the way. If you would prefer ongoing support and guidance then a franchise might be a better choice for you
- Even though the initial costs of buying an existing business can be higher, you have the ability to change your business model should it not be profitable. A franchise could potentially require a lower investment but you will need to meet the obligations of a franchisor on a monthly basis
- Along with initial start-up costs, franchisees also need to pay ongoing fees to a franchisor. If you are happy to do this in exchange for more stability then it’s the ideal option for you
- Since some franchises are easily recognised and have a large number of outlets, branding and marketing comes easily. If the business you are thinking of buying hasn’t given their brand proper attention, you could find that some extra effort is required to start generating profits
If you would like to find out more about franchising in SA, visit the BizConnect franchising section here.
Funding your business purchase
There are a several different funding opportunities you can consider as you begin the process of buying a business. You should know that it doesn’t matter whether you’re starting a new business or buying an existing business, investors will still want to see your research and future plans before they will consider approving your application.
Take the time to put a detailed business plan together that includes all of the information a potential investor would want to see. Here is a link to a business plan template that you can easily customise.
Funding options available to you are:
To apply for bank finance you would need to visit your nearest branch for them to collect the necessary documents and to evaluate the risk of the business you want to purchase. Your personal credit record will also be taken into account. Visit the Standard Bank site to find out more about their funding options.
Often start-up entrepreneurs make the mistake of trading from their personal bank account. This makes it harder to differentiate between your personal expenses and business expenses. It also doesn’t allow you to build up a credit risk profile for your business, which is an important factor should you ever want to approach a bank for financing. Rather, start trading as a business from the get-go by opening up a Business Current Account.
These investors are willing to take a risk in a business in exchange for high returns. Angel investors use their own funds to finance a business and will usually give you a certain number of years before they expect to see returns. Most angel investors will also fund businesses where their skills and guidance can be of use. Below are two organisations that you can contact:
The South African government aims to assist previously disadvantaged individuals with the funding required to develop a business. Entrepreneurs looking to take this funding route should be prepared for a lengthy wait, large amounts of paperwork and strict selection criteria. Benefits of a government loan are that the interest rates tend to be lower and the repayment terms are a lot more flexible. Websites that you can visit for further information on government funding are:
Private equity funding consists of several third party investors pooling together to fund a business. Private equity investors are willing to invest large sums of money but this can be quite a difficult and lengthy process. Their investment periods are however a lot longer than other funding institutions. Organisations that you can contact about private equity funding are:
There are a number of grants and assistance programmes available from the South African government if you are looking to buy a business. This funding option has very strict requirements but that is because it doesn’t need to be repaid. You will need to prove that you’ll be aiding the economy by creating jobs and complying with BEE policies.
Need a little extra assistance? Here are some of the top reasons why entrepreneurs fail to secure funding.
Pitfalls to avoid when buying an existing business
These are the common mistakes made when buying an existing business
- Buying the wrong business. Buying a business that that does not suit your skills, knowledge, interest and personality
- Insufficient homework. Not doing enough research and due diligence on the business
- Having no idea of the value of the business. If you want to buy a business you should know every financial detail of it, so that you will know the right price to pay. You can do this by reviewing the financial status of the business
- Insufficient information. Having no idea why the business is being sold
- Over-extending yourself financially. This is a common mistake. It's far better to have enough money when you buy a business so that you will not be buried in debt
- Ignoring the company's image. This could be critical to the value and success of the business since most businesses have established an image over years
- Not protecting your asset. When buying a business, structure the contract so that you do not put your personal assets at risk
- Not negotiating. If you are buying a business you should negotiate every detail about the acquisition from physical assets to intellectual property
- Making changes immediately. This can cost you dearly as you may alienate experienced employees who are familiar with how the company works
- Not promoting the business. Assuming that the business is already well-established and that it will just promote itself is a big no-no. Develop a comprehensive advertising and marketing plan to ensure success.
Business valuation methods: How to get it right
- Look for a business with a strong customer base, growing sales, good staff, established procedures and positive cash flow
- Do your research. Make sure you get all tax returns as well as profit and loss statements. This will give you insight into factors like mismanagement
- Get objective assessment. Use objective, third-party criteria to make sure that the terms of the agreement are fair to both parties
- Find out what's important to the seller. Some business founders are more interested in a capable buyer than a hefty purchase price. That can save you a lot of cash
- Talk to the employees. Make sure you hold onto people who may be hard to replace. Their expertise and knowledge of the business may be invaluable
- Talk to customers and suppliers. Get them to tell you as much as possible about their experiences of doing business with the company
- Location is critical. If you rely on retail sales, make sure the location is one that will attract traffic.