Deciding to buy a business
Choosing to buy a business that is already operating can give you a quicker path to becoming a business owner than creating your own. But it does have some potential risks.
There are several factors that potential business owners can consider to help minimise these risks when purchasing a business.
Consider the following:
- Does the business meet your goals and visions?
- Will the existing business be able to become exactly what you want?
- Is the business profitable and producing stable cash flow?
- Is there an opportunity for growth?
- Is it better for you to continue with an existing business, or should you establish your own?
Advantages and disadvantages of buying a business
Understanding the advantages and disadvantages of a particular business will help you determine if it is the right business and option for you to purchase.
Advantages
Existing businesses are already operational and may have a strong customer base and set of suppliers or policies and procedures.
The advantages this presents to you as the new business owner include the following.
The business and everything involved with its operation is sold to the purchaser to continue running the business. The business can continue running as it has been prior to the sale.
- Initial costs and activities have already been completed
- Premises may be fitted out and tested
- Legal structure may have already been established
- Licences and registrations may be in place
- Branding may be in place
- There are no immediate financial issues to overcome.
- Records can be used to show lenders or investors how the business is performing financially.
Reports will show seasonal and other market variations. These can help to plan for the future.
- Customers will likely continue to buy the business's goods and services.
- Suppliers, stock and supply chain are established, and long-term contracts are in place.
- It should be relatively easy to continue the supply of goods and services to the business and fulfilling customer needs.
- Staff are in place who know how the business runs and have the skills to help its ongoing success.
- Existing policies and procedures should comply with legislation, regulations and standards expected of the business.
The business materials and equipment are in working order, reducing the need to buy anything essential for day-to-day running.
There is no need to establish and secure the brand assets.
The seller can provide training and help the transition of the business, customers, staff and suppliers to you. They will give you a strong knowledge base to draw on.
Disadvantages
Not all businesses operate or are set up correctly, so even if the business appears to be a viable option for your goals, there may be existing issues you will need to deal with after purchase.
These disadvantages may present themselves in the following ways.
You may have more work to do, systems to develop and money to spend to run and grow the business.
You will need to take over the debt and pay the debtors on time.
You will need to manage loan repayments, investor expectations and the risks involved with using your home as a guarantee, if you choose to.
Other expenses may arise outside of the stated purchase price of the business.
Customers may stop buying from the business once the seller leaves and could affect referrals to the business or online reviews during your time as owner.
- The business may be tied to current suppliers and have difficulty switching to more suitable ones.
- You may be unable to negotiate supplier prices or improve existing terms.
- You may need a larger warehouse than necessary to hold excess stock.
- Excess stock may inflate the sale price.
- Not the right mix of staff
- Poor training
- Inflexibility and lack of resilience
- Culture change difficult
- High staff turnover
- Added financial investment is needed to maintain or upgrade equipment.
- There may be workplace health and safety (WHS) compliance issues or sustainability issues, such as environmental compliance.
- Overstated assessment of the business may inflate the sale price.
- The business reputation with customers may be lower than expected.
- It may be difficult to improve the reputation of the business.
- The market and customer preferences may be moving elsewhere, having a need for different products or services.
- The relevant demographics may have changed.
- The industry may be in decline.
- New competitors may have emerged.
Assess the advantages and disadvantages of a business
Create your own list of advantages and disadvantages for a business that is for sale and you are considering buying. Consider if this makes the business a good investment and include the list in your business plan if you proceed.
Making the decision
Along with understanding the advantages and disadvantages of buying a business, consider other activities to help identify if the business is right for you.
Talk to your family, friends and other business owners to seek advice. Discuss the advantages and disadvantages you have identified with local business networks, business advisers and industry experts.
Also consider the following during your decision-making process.
- What type of businesses are for sale in your industry? If nothing suitable is available, would you want to start a new one?
- What type of business model would you prefer and are those business types available (e.g. wholesaler, online retailer)?
- What time would you allocate to work within the business? Are you buying the business as an investment or do you plan to be actively involved in the day-to-day running of the business?
- What is your role preference (e.g. management, working directly with customers, administration)?
- Are you prepared to take on debt, and if so, what is your limit?
- Would you purchase a business using your personal assets, equity in your house or superannuation?
- Do you want to use the established systems or replace them with your own?
Researching industry records will similarly help your decision-making as it will provide a complete history of how markets have performed.