‘Forget startups’ – why you should consider buying an existing business
For many people looking to go into business – there are usually only two options to consider: launching a brand new startup or buying a franchise.
There is however, a third option that has recently began to grow in popularity – purchasing an already existing business, says Jeremy Lang. Lang is Regional General Manager at Business Partners Limited, an SME financier.
Not only does this option potentially present less risk than building a startup from scratch, there are also often less hoops to jump through than you would typically have with buying a franchise.
However, this option is not without work. “While the owner of a startup business would have to build up a brand and customer base, hire new staff and establish cash flow, an existing business offers immediate cash flow, already trained staff with implemented systems and infrastructure, as well as brand awareness in the marketplace,” says Christo Botes, executive director at Business Partners Limited.
And it’s not only the entrepreneur that stands to benefit, he adds.
“The personal flair, enthusiasm and wave of fresh ideas from a new business owner could give the business a new lease on life.”
To find out the pros and cons of buying an existing business we speak to Lang. Here is what he has to say about how you should evaluate a potential buy, and the skills, experience, and temperament an entrepreneur needs to make a success of this option.
Q: What kind of entrepreneur (skills, experience, and temperament) should look into buying an existing business?
- Someone that can bring in a new energy and new line of thinking into the business
- Someone that has a good eye for improving efficiencies and processes.
- Someone that can identify new opportunities/product lines or markets within the existing business
- They should preferably buy a business in an industry in which they have the relevant experience and technical skills as you cannot afford to be making costly mistakes at an early stage of being in business. As such, this would be someone with experience in the industry.
Q: What should they be looking for when evaluating a potential buy?
The entrepreneur looking at the following when evaluating a potential buy:
1. Establish value – Ensure that you are getting value for your money. Use the skills of experts such as accountants to conduct a formal valuation, thereby avoiding overpaying for the business.
2. Conduct a thorough due diligence – The seller has an incentive to extract maximum value out of the sale of the business. As the entrepreneur evaluating a potential buy, you should verify key elements of the business such as financial statements, key contracts, and condition of the assets, etc. to ensure the information provided to you is accurate.
3. Obtain the real reason why the seller is selling – You need to find out the main reason why the seller is selling their business – why would anyone want to sell a business that is generating good profits?
4. Consider how much of the business walks out with the seller – Some businesses do well as a result of customers doing business with the owner, not necessarily the business. Try to negotiate a hand-over period where the current seller can introduce you to key customers and suppliers.
5. Investigate whether there are any pending legal cases and/or contingent liabilities.
6. Have a Deed of sale – This is a crucial document as it prescribes the terms and conditions of the sale. Ensure that you understand all the terms and conditions and seek specialist legal advice if required.
Q: How is buying an existing business different from buying a franchise?
The process of buying an existing business is relatively similar to that of buying an existing franchise. However, buying a new franchise vs. buying an existing business would have additional points to be considered. In addition to the points raised above, a thorough due diligence needs to be conducted on the franchisor i.e. financial strength, relationship with franchisees, quality of training and support systems, reputation in the market place.
The biggest difference is that under a franchised system you are bound by the terms and conditions of the franchise agreement and this may limit your entrepreneurial flair.
On the positive side, a franchised system should have a proven business model, good support systems and brand acceptance in the market.
Q: What are some of the advantages that an entrepreneur can enjoy with an established business?
The following benefits come with buying an existing business:
- There is an established brand,
- There is trained staff,
- There is an established customer and supplier base,
- There is hopefully a good track record of financial performance which gives more certainty, and
- Systems and processes are already in place.
Q: And what are the disadvantages?
The risk involved when buying an existing business includes:
- Losing key contracts/customers as a result of the seller leaving the business, and
- Staff may be set in their ways, and so to get buy-in from them to change things may become challenging. This can be mitigated by having a well thought out change management process.
Q: What kind of financial considerations should a potential buyer be aware of?
The following financial considerations are important:
- Investigate the credibility of the financial information provided.
- Verify key numbers such as turnover, cost of sales, gross profit margins, labor, rent etc.
- Industry benchmarks – Consider whether the key metrics in line with similar businesses in the same industry.
Q: How can a new buyer still inject some of themselves into an already established brand?
In most, if not all businesses there is always room for improvement. For example:
- On the sales side, the entrepreneur would need to ask if there is an opportunity to improve current products or to add to the product range. Are there markets that have not yet been penetrated?
- On the cost side, they would ask if there is there room for improvement as far as efficiencies are concerned. They could also consider technological improvements in the production processes that can assist in speeding up or reducing costs in the production process.
- They would need to display passion for the business including by involving staff. They would need to ensure that they the buy-in from the staff and in the process hopefully create a culture of high performance and success.