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Can Buying a Business Help You Build Your Dream Faster?
These days, it’s not particularly difficult to set up a business and be your own boss and there are still many of us who yearn for the freedom that it can bring.
If that’s your dream too, and you’ve already done a little research, you’ll know that the tough part is getting your dream start-up business to the point where it’s fully sustainable and paying its way.
Of course, there is an alternative approach: You could purchase an existing business for sale. But what are the potential advantages? And are there any drawbacks?
Advantages of buying an existing business:
- Proven track record
A trading business will have financial records. That will enable you and your team to perform due diligence to establish the trading performance of the business. If you dream of owning a seaside fish and chip shop, for instance, and spending your downtime on the beach, buying a going concern can be an attractive proposition.
That will give you all-important information about seasonal trading patterns, year-on-year growth, how costs have been controlled, and more. Such information will inform your conversations with the present owner and give you a real insight into the business. For instance, it should help you understand how the present owner survives in ‘low season’, and also help you understand what potential there might be for growth and expansion.
- Easier to obtain financing
Should you need financing for your new business, lenders will look more favourably on an application from an existing business. This is because any lender will need to see how the loan will be repaid. Clearly this will come from the trading profits you generate from the business you acquire.
A start-up enterprise applying for funding will be asked to present a detailed business plan showing how the developing business will repay the loan. But this is simply a projection, so lending institutions treat such provisional data with a great deal of scepticism and will always subject your figures to intense scrutiny.
However, when seeking funding for an existing business, you are submitting verified financial information about the actual performance of the business you wish to acquire and develop. And even though your plans must still be thoroughly detailed, your request will invariably be far more welcome because you are presenting concrete trading figures from a venture which is up and running.
- Start making money from day one
A start up business can be a lot of fun, but it won’t pay its way for quite a while. And though you can predict how many years it may take to build your customer base to a level where you will start to make you a profit, it’s not something you can ever guarantee. However, the advantage of an existing business is that you will inherit a fully equipped business from day one.
Given that the expenses of running your fish and chip restaurant or shop will already be known, you can get a clear idea of how your trading income will develop in the future – even if you simply ‘tread water’ and supply exactly the same offer as the previous owner.
- Operating an established brand
Well-established entrepreneurs will testify just how tough it can be to build up a new start-up business. As a new business owner you will obviously need to acquire supplier contacts – who may initially view your approach with some circumspection. You may also need to find, interview, appoint and train staff – which is an immensely important, but often unpredictable, task.
Most importantly of all, you will need to begin the uphill slog of marketing your business and building a trading reputation which you must then maintain and develop as the years go by.
However, when you reopen an established catering venue ‘under new ownership’, the problems of building your enterprise no longer apply. Your team’s due diligence will have verified the trading performance of your new acquisition, and with some timely pointers from the previous owner (and maybe support from the experienced staff you retained), you are now in the driving seat. And if you choose, you will still have options to build the business in new directions.
Disadvantages of buying an existing business:
- A substantial purchase
Buying a reliable, ready-made business can be expensive. But that’s because of all the benefits it brings. So, it’s a matter for you and your advisors to carefully calculate the profitability versus the expense of acquiring your dream establishment. So it’s all about value for money and potential.
- Inheriting problems
Robust due diligence is designed to deliver you a realistic picture of the true worth and potential of your chosen business. But it’s fair to say that you should investigate well beyond the confines of trading performance etc. to satisfy yourself the business is really what you want.
Putting all other considerations aside, acquiring an existing business will always be a less risky prospect (and a whole lot faster) than starting your own enterprise from scratch.
By Matthew Hernon is an Account Manager at Dynamis looking after Business Transfer Agents and Franchises across BusinessesForSale.com and FranchiseSales.com.