Buying an Existing Business
If you think that starting your own business is too difficult or costly, you could consider buying an existing business. The main advantage of buying an existing business is that you are dealing with a known entity. You are purchasing stock, equipment, a location and more importantly, customers and reputation.
However, this has advantages and disadvantages.
Some of the advantages are:
Immediate business: Operations can start immediately.
Quick cash flow: Sales of existing stock and collection of receivables can produce quick cash flow.
Existing customers: Customers and suppliers are already in there.
Existing goodwill: If you buy the goodwill as well, you already have customers and suppliers.
Eliminate competition: Buy the competitor
Some of the disadvantages of buying an existing business are:
Cost: Buying an existing business can be more costly than starting your own business.
Problems: You may also be buying the inherent problems in the business.
Obsolete goods: Some of the goods may be obsolete.
Personality conflicts: Your personality may clash with existing staff.
Bad debts: You may be buying bills owed to the business (receivables) that will never be collected.
The steps involved in purchasing a business are similar to those you need to take whenever you make any major purchase, such as:
Locate a good business to buy: Try the Internet, newspapers, Real Estate Agents or even approach a current owner.
Research the business thoroughly: Obtain the assistance of a Real Estate Agent, Lawyer, and Accountant.
Decide whether to buy: Use your head as well as your heart. Discuss the purchase with others.
Preliminary Matters to Consider
SUITABILITY OF THE PURCHASER FOR THE BUSINESS
reasons to go into business
comparison of business with employment
suitability of purchaser for business
suitability of purchaser for the particular business
financial capacity of purchaser for business
ASSESSMENT OF THE BUSINESS
Valuation of goodwill
Assessment of trading record (past, present and projected)
will the business give fair income?
will the business return investment in goodwill fixtures and fittings, equipment and stock either by resale or during the economic life of the business?
will the business give interest on invested capital?
Valuation of fixtures, fittings and equipment
inspection of premises, fixtures, fittings and equipment
inspection and valuation of stock
inspection and valuation of work in progress
inspection of vendor’s tax returns
inspection of vendor’s books of account
inspection of vendor’s wages book
inter-firm comparisons (statistics on businesses)
economic life of business, e.g. lease, competitive products, competitive businesses, etc.
special factors which contribute to success of business, e.g. popularity of proprietor
techniques or skills of proprietor, location, etc.
Other possible considerations
competitive businesses existing or proposed?
competitive products existing or proposed?
reliability of future trading?
reasons for vendor selling business?
inspect current licenses, permits, business name
authority of vendor to sell business registration certificate, patents, copyright, trademarks, etc.
inspection of contracts for current or future work with customers