Advantages and disadvantages of buying a business.
There is little doubt that buying an established business minimises the risk as opposed to a start-up business. In most cases, when buying a business, you take on an existing operation that’s already yielding cash flow and is profitable. You obtain an established customer base, a reputation and in some cases the possibility of retaining employees that are familiar with the business.
Advantages of buying a business.
Buying an established business is considered far less perilous than a start-up business, especially if you can buy a good profitable business for the right price. Consider these benefits:
- The challenging start-up work has already been done. The business should have strategies and procedures already in place.Buying an established business can mean immediate profitability and cash flow.
- The business will have financial history, which will indicate past financial performance. These indicators will also support the future financial performance of the business and can make it easier to secure future borrowings or attract investors.
- You will acquire current clients, industry connections, goodwill, suppliers, staff, equipment and stock.
Disadvantages of purchasing a business.
Remember, not every business is a worthy business to purchase. Many businesses can be unprofitable or under-performing business hence the reason for the sale. While this can also be a chance to buy and develop a poorly performing business at an attractive price, it can also be a perilous investment. Consider these disadvantages:
- The business may require significant improvements to, or replacement of plant and equipment.
- You often need to invest up front and you will also have to allocate funds for professional fees to solicitors and accountants or alike.
- The location of the business may not be desirable, or the business may have been poorly managed.
- Outside factors such as direct competitors or a falling industry can affect the performance and growth of the business.
Deciding to buy a business.
Before you decide on buying a business, it’s important to understand what’s involved and whether or not you’re the right person for that business.
Operating a business can be challenging, so take some time to assess your suitability. You need to be sure you have the necessary skills to succeed. Once you’ve decided you’re ready and willing, then you need to find the right business.
- A compatible industry, one that matches your experience. (don’t let your ambitions out way your abilities.)
- A desired business model (retail, wholesale, on-line, etc.)
- A favourable location (idyllic customer exposure, potential for growth, distance to travel to and from work.)
- Operating hours (most retailers trade 7 days, restaurants often open evenings.)
- How much money you have accessible to fund the purchase including working capital and other associated costs.
Conducting due diligence.
When buying an established business, it is crucial that you examine the business in detail. This process is commonly known as due diligence. Due diligence is generally conducted once a buyer and seller have agreed in principle on terms, but prior to contract signing.
You should always perform due diligence with the assistance of your lawyer, accountant or business broker.
Examining a business.
To conduct due diligence, you’ll need to prudently review at a minimum:
- profit and loss statements (min 2-3 years)
- records of accounts receivable and payable
- balance sheets, tax returns including business activity statements
- the seller’s claims about their business (e.g. reasons for selling and the business’s character)
- stock at hand including value
- details and condition of plant and equipment
- intellectual property (e.g. trademarks and patents)
- existing contracts with clients and staff
- lease arrangements
BisSales showcase’s many businesses for sale and would be happy to assist you with information on any of our exclusively listed businesses.
However, should we currently not have a business that meets your requirements, we will be happy to assist you with our buyer’s advocate service. This service not only helps you find your ideal business, we will also negotiate the sale on your behalf.
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