Do you want to be your own boss? Are you worried about the risk of starting a new business? There are various reasons, and advantages, to buy an established business as a going concern rather than starting from scratch.
An existing business typically offers –
- an operational and financial history,
- the possibility to generate profits immediately,
- an established clientele, licenses, rights, franchises, exclusivity in representation, etc.,
- and a unique and established location.
But, there can also be some disadvantages of buying an established business.
- The capital required is typically greater.
- There may be hidden problems associated with the business acquired.
- It may be that you pay for surplus value.
Why is a business sold?
This is a fundamental question in the mind of all serious buyers. It has to be answered with total honesty, even if the reason for the sale is that the business is experiencing losses. The owner must be sure that they want to sell; testing the market could be dangerous.
Typical reasons to sell a business:
- Death of shareholder or owner
- Disputes between partners and shareholders
- Excessive competition; redundancy
- Additional capital requirements to keep the business viable
- Settlement ordered by the court
- Lack of successor
- Labour disputes (unions)
So, what are the basic elements of a sellable business?
When considering buying an established business, look for the following:
- Reasonable price
- Complete financial history
- Up-to-date permits, licences, zoning permissions, etc.
- Free of liens and lawsuits
- Ideally, a business that is profitable
In some cases, a business that is not currently profitable, but with an injection of capital, and modifications, can quickly become a profitable business. For example, a business that has the potential to grow or increase performance through the exploitation of economies of scale.
You should also be sure to examine the following:
- Financial statements for last 3 years, and interim status
- Lease agreement
- Property deeds
- Real estate appraisal (if applicable)
- List of equipment and furniture
- Credit report
- Franchise agreement (if applicable)
You should also exercise caution with respect to aspects such as:
- Existing contracts that limit growth or flexibility
- Pending litigation; ownership problems
- Environmental problems
- Structural limitations (if the building forms part of the sale)
- Lack of adequate parking
- Potential expropriation
- Disputes between partners
- Disputes with business neighbours
- Level of sales and data on the market that it supplies
- Litigation, pending claims
Why Use a business broker?
For those who want to buy an established business, there are various advantages of using a business broker. The business will be subject to an unbiased assessment. It allows the buyer to remain anonymous, initially; which avoids employees, suppliers or customers finding out about the intention to sell.
Also, a broker can evaluate and filter non-serious buyers, avoiding unnecessary disclosure of information, and avoid wasting the time of the business owner.
The qualification of potential buyers is a critical function of a business broker, as around 90% of those who respond to advertising regarding business sales are not serious buyers, for one reason or another.
As a buyer, working through a business broker means your interest will be taken seriously by the business owner selling.