Buying an established business offers entrepreneurs a level of security in which you can benefit from a company’s proven track record. It also means you can potentially invest in a company that already has a customer base, suppliers, reputation and more importantly revenue, which you can then use to attract further investment.
It also means you are walking into an operation which has likely already survived it’s perilous early start up days. Survival rates for start-ups are low, with more than half of new business folding within the first five years.
So what really is it about buying an existing business that gets you ahead of your fellow entrepreneurs who are starting from scratch?
Proven track record
Good or bad, you’re investing in something which is or has already been trading. It is often much easier to secure finance when buying an existing business, as buying is lower risk and the business already benefits from an existing customer base.
Prospective investors can see that there is a need for this business in the area, making it easier for potential purchasers to secure a business loan.
Make sure you receive clear, in-depth figures and notes on how the business is performing, this is very important to determine the value of the business, and to understand any potential pitfalls that may lie ahead.
The longer the business has been trading, the more secure your investment will be. However, buying a business with healthy profit margins, high turnover and established customer and supplier relationships will come at a higher cost.
If you are an experienced business owner with adequate funds and know-how in a particular sector, it may be in your advantage to buy a business that is not performing to its full potential. The business will have a lower asking price and, after researching the existing operation, you may feel confident on improving the business in order to boost profits.
It takes time to establish secure relationships with suppliers and embed your business within a community. Buying a business allows you to benefit from years of trading with suppliers and customers.
You’ll walk into a business that already has a list of suppliers. Even if you want to change things you will still be able to trade right away. The same goes for customers. Even under new management loyal customers will hopefully give you the benefit of the doubt and continue to buy from you.
These relationships can also be a useful source of information. Speaking to suppliers could unveil certain truths about the business that the vendor could choose to omit during negotiations.
Similarly, speaking to current customers will give you an idea of where the business is succeeding and/or failing. Checking out social media and online reviews can also provide an insight into a business’ true reputation.
Buying a business means you will benefit from immediate income, assuming the business is making a profit.
Starting from scratch often involves a lengthy set up phase before you can start trading. If you’re setting up, for example a bar, in a vacant premise, you must first register the company, seek planning permission and get council approval, obtain the correct licenses, buy new equipment and fit out the premises; this can be a very long and expensive process.
You may also come across some disgruntled residents who choose to object your planning applications due to possible noise and disturbance. Whereas, buying an established bar that residents are accustomed to will be less problematic.
Start-up costs can be unpredictable, depending on the type of business you decide to go into and what equipment is required. You will also need to supplement your earning while the business is being set up. Whereas, buying a business allows you to start earning as soon as you get the keys.
Growing the business
For many, satisfaction comes from creating something from nothing and seeing it grow. Although buying business can also provide a level of satisfaction through growing and improving a company’s current infrastructures.
Freeing your time from getting a business off the ground means you can focus efforts on developing areas of the business that are underperforming or focusing on ideas to generate extra revenue.
For example, if you are buying a coffee shop, you may decide to turn the coffee shop into a micro roaster, which will give the business a new image and allow you to offer other higher-quality product.
By having an already established business you can reinvest finances towards growing the enterprise, which allows you to put your own stamp on the business.
Staff in place
Having staff already in place can either be a benefit, or a disadvantage. Experienced staff who know how to work within the business can provide you with exceptional first-hand insight into how the business runs. It will also save you time hiring and training up employees.
However, some staff may be set in their ways and unwilling to change. It is important to identify any staff members that will hinder the progression of the business by not adapting.
You should also establish any managerial issues from the start and determine whether you want to keep the current managers or employ a new team. Buying a business which has a skilled team of highly competent and reliable workers is hugely beneficial. A 2014 report carried out by Oxford Economics found that on average, workers in SMEs take 24 weeks to reach optimum productivity; therefore, having longstanding employees can be a big asset.