Buying a Business

Building a business from the ground floor tests every aspect of one’s entrepreneurial ability. The challenge and potential to create a business unlike any other is part of the entrepreneurial drive and is the only option for many independent-minded entrepreneurs. However, in many circumstances starting from nothing, bootstrapping, building a customer base, and slowly building a business is the only option due to funding considerations.

Other entrepreneurs choose to purchase an existing business. When starting a business, every aspect of the business is unknown. You don't know who your customers will be; you don't know how many employees you will need; you don't even know if the business will succeed! When you buy an established business, all of those “unknown” details have been worked out by the previous owner.

In order to buy the right business or franchise, you need to do a thorough investigation of its historical performance, its operations, current status, the staff and management, competition, the industry and its future potential. Once all this analysis has been completed, you will then have to determine how it measures up with your skill, expertise and leadership. All of which is so much easier to do with an existing business. There are a number of reasons to consider the purchase of an existing business rather that starting one:

Advantages

• Risk. Buying an established business, and therefore proven concept, is less risky – as a buyer you already know the process or concept works. Consequently, financing a purchase is often easier than securing funding for a start-up business for that very reason—the business has a track record. A bank will be able to look at the historical results for the business, not just rely on projections (which they assume will be wrong anyway).
• Proven business concept and processes. Proof of concept is invaluable to an entrepreneur. With a proven model the business has immediate credibility and perception of success. There are also proven products, services, marketing and, sales strategies in place.
• Brand. When you purchase an existing business you’re buying a brand. The on-going benefits of any marketing or networking the prior owner has done will transfer to you. When you have an established name it’s easier to place cold calls and attract new business than with an unproven start-up. A brand is an intangible asset that’s difficult to put a price on.
• Relationships/Goodwill. With the purchase of an existing business, you will also be buying an existing customer base and established suppliers that may have taken years to develop. Seller support during the transition can help the buyer to establish good relations with suppliers and customers thus helping the buyer to capitalize on the goodwill that may have taken the seller years to establish.
• Growth. When you buy a business, you can start working immediately and focus on improving and growing the business immediately. The seller has already laid the foundation and taken care of the time-consuming, tedious start-up work. Starting a new business means spending a lot of time and money on basic items like computers, telephones, furniture and policies that don’t directly generate cash flow.
• Trained Employees. In an acquisition, one of the most valuable and important assets you’re buying is the people. It took the seller time to find those employees, train them and assimilate them into the company culture. With the right team in place, you will have an easier time implementing growth strategies. In addition, with seasoned employees in place it will be possible for the entrepreneur to take vacations, spend time with family, or work on other business ventures. Start-up owners are often unable to take time away from their business for years.
• Cash flow. An existing business can generate positive cash flow from day one. The sale can be structured so you can cover the debt service, take a reasonable salary, and have some left over to take the business to the next level. On the other hand, some experts say start-ups aren’t expected to make money for the first three years.

Disadvantages

• Substantial Investment. The investment necessary to buy an existing business can be substantial. In addition to acquiring the business assets there may also be substantial professional fees incurred in the transaction, including attorneys, accountants, surveyors, etc. It is important to seek the advice and guidance of business finance experts, lawyer and certified accountant before you begin your search for an acquisition target. A good “team” is necessary to put the best total package together to ensure a successful acquisition and success long term.

• Additional Investment. If the business requires a turnaround you may need to invest quite a bit more in addition to the purchase price to give it the best chance of success.

• Legal/Contractual. You may be bound by any existing contracts or other legal obligations or liabilities the previous owner leaves in place. In addition, certain contracts or licenses necessary to the success of the business may not be transferable to another owner or may take time to be transferred.
• Poor Reputation. You also need to consider why the current owner is selling up and how this might impact the business going forward. While goodwill is a desirable advantage of buying a business, if the seller has a poor reputation considerable time, effort, and money may be required to establish good relations with customers and suppliers. Good due diligence can uncover problems in this area, as well as with the other disadvantages.
• Goodness of Fit. The previous corporate culture and employees may not be a good fit for the management style of the new owner. The larger the discrepancy between the new owner’s style and the established culture, the greater the possibility of conflict. In order to buy the right business or franchise, you need to do a thorough investigation of its historical performance, its operations, current situation, the staff and management, competition, the industry and its future prospects. Once all this analysis has been completed, you will then have to determine how it measures up with your skill, expertise and leadership.

Two Ways to Buy a Business

A buyer purchasing a business has two options for structuring the deal (assuming the transaction is not a merger). The first option is an asset acquisition, in which you purchase only those assets you want. The advantage of an asset acquisition is protection from legal liabilities since instead of buying the corporation (and all its legal risks), you are buying only its assets.

The purchase of assets both tangible and intangible is a tax advantage for the buyer. Not only can you choose to purchase only the assets that you feel are necessary for the successful operation of the business, you may also reduce your company taxes through the mark up and depreciation of tangible assets. While this method is not nearly as appealing for the seller it is a clear advantage for the buyer.

The other option is a stock acquisition, in which you purchase stock. Among other things, this means you must be willing to purchase all the business assets--and assume all its liabilities.

The final purchase contract should be structured with the help of your acquisition team to reflect very precisely your understanding and intentions regarding the purchase from a financial, tax and legal standpoint. The contract must be all-inclusive and should allow you to rescind the deal if you find at any time that the owner intentionally misrepresented the company or failed to report essential information. It's also a good idea to include a no compete clause in the contract to ensure the seller doesn't open a competing operation in your area. This option is preferred if the expectation is for the business to continue operating in a relatively seamless manner which could preserve much of the customer base.

Useful Links:

http://www.businesslink.gov.uk/bdotg/action/detail?itemId=1074410852&type=RESOURCES

http://www.entrepreneur.com/startingabusiness/startupbasics/article79638.html