Things To Consider When Buying An Existing Business

Updated: August 8, 2016

Traditionally, people who want to have a business would always think of doing a start-up, acquiring a franchise or joining a multi-level marketing network.

However, one must not forget that buying an existing business is another way to become an entrepreneur. This thought came to me during a recent trip to Pansol, Laguna.

While going around the area, I noticed a lot of private resorts for sale. A colleague who was with me remarked that if he only had the money, he would consider buying one of them.

Although I agreed at first, I then realized that acquiring one of these private resorts would probably be not a very good idea. The existence of these numerous establishments for sale may be a sign of declining profits for the business.

Buying an established business is not as easy as it may seem. First of all, you need to consider its advantages and disadvantages.

Pros of Buying A Business

• The business is already up and running and has surpassed the critical start-up phase. This means you start making money right away. Furthermore, business controls and systems are already in effect and there may only be a need to optimize them once you take over.
• It already has existing customers. Thus, you will less likely spend much on advertising and marketing during the early stages of ownership transfer.
• The business has most likely established a good relationship with reliable suppliers and you can immediately take advantage of the existing credit line, have access to the most affordable prices and avail the discounts enjoyed by the previous owner.
• You already have historical cash flows, performance data and other records which you can use to do an immediate SWOT analysis. This will then help you determine how you can make the business more profitable.
• The previous owners will most likely give you the trade secrets and offer initial help and support as a sign of goodwill for buying the business.
• In general, it is less risky and offers a greater chance of success than starting the same business from scratch.

Cons of Buying A Business

• Buying a business usually requires a larger initial investment as compared to doing a start-up or acquiring a franchise.
• The seller may choose not to mention or forget some important details about the business, specially the real reason why it is for sale. Thus, it will still be necessary to conduct your own market study to determine the status and profitability of the business.
• There will be a lot of legal papers to process before a full transfer of ownership is accomplished.
• Some degree of disruption in the company could occur specially if the previous owner held a critical role and influence in the administration and operation of the business. You would need to gain the personal trust of the employees and existing clients. You would have to convince and show them that you can run the business the same way or even better than the previous owner.

If you’re interested in buying an existing business but don’t know any that’s for sale, then simply look for some near your desired location and maybe ask around. These things usually travel by word-of-mouth.

Moreover, a lot of business owners do place advertisements in newspapers, magazines and online forums, just look under the category of Business Opportunities or Businesses For Sale.

Furthermore, before you go on and purchase a business, it may help to ask yourself first the following questions below.

• Is the business right for you? Does it complement your skills, knowledge, interests and personality? Will you be passionate about this business?
• Can you deal well with the the type of customers and employees that the business have?
• Have you done proper due diligence and is fully aware of the existing and potential problems of the business? Do you have a complete list of the current assets and liabilities of the company specially outstanding debts?
• Are you satisfied with the reason given to you why the business is being sold? Have you done your own research and is fully convinced that the business is profitable and has the potential to grow?
• Have you checked the image of the business to its employees, customers, suppliers and competitors? How do each of them perceive the company? Is it good or bad?
• Is the selling price reasonable? What is the current net worth of the business?
• Are you ready to go through the legal issues and processes of the acquisition? Do you know or at least have an idea where to get a lawyer that can help you design and negotiate the details of the purchase contract?
• Do you have enough money to buy the business? If the business fails, will you still be in good financial standing or will you be left under serious debt?

Buying an existing business can be highly profitable, but it is also complicated. Yet, with enough patience, enthusiasm and diligence, you could discover a real goldmine and take yourself one step closer to financial freedom.

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Photo credit: stevendepolo