Change is the only constant there is. The core purpose of any person is to grow. And in this case, I shall look at the considerations to put in place when buying an existing business.
I will take you in-detail step by step, on the elements to think about. Buying an existing business is a big step, and it has a lot of challenges ahead. However, I will expedite the process for you.
But first, let’s soul search and see if we are built for this. You may have heard of SWOT analysis (strengths, weaknesses, opportunities, and threats). This is a method used the day to day running of any business or to gauge ourselves. It will be a helpful tool in helping us make the right decisions when buying an existing business.
Is it a Good Idea to Buy an Existing Business?
Purchasing an existing business for sale can be an intricate thing. When starting your journey as an entrepreneur, here are some of the questions you need to ask yourself.
- Why is the business being sold?
- Does it align with my goals and ambitions?
- Do I have the right knowledge and expertise to steer this business in the right direction?
- Are there enough resources to help me implement and execute any plans?
- Do I have a strategy or a business plan to guide me through to success?
- Is the business financially stable?
- What is its potential for growth?
- How much am I willing to fork out?
- How will I raise money to buy a business?
Typically, answering whether or not to buy a business would be easy. But again, this depends on a lot of factors which vary to different people. This article will give you enough information to help you in your final decision.
Franchising or Buying an Existing business?
Both franchising and buying existing businesses come with a share of ups and downs. The choice you make between the two will sorely depend on your ability or inability to do either.
Buying a business involves getting full rights of ownership of a particular business on purchase, giving you total control over the business. The owner will make all the decisions entailing the business, thereby steering the company towards his goals.
Franchising, however, encompasses being licensed to sell goods and services under a specific brand name. In turn, you get to pay a primary amount or other fees depending on the agreements provided by the franchisor. It’s the legal power or authority to carry out the business under the franchising brand.
Buying into a Franchise
- The franchisee will have to go with the guidelines given on how to run this business—thereby enjoying the full benefits of buying into the brand.
- You will not have to go through the hustle of creating a business plan since it’s an already established business.
- Your customers will be enjoying the consistent taste of products and services from the already established brand.
- From the word go, you, the franchisee, will be receiving a steady stream of income.
- You enjoy a good number of customers who are accustomed to this product or service, generating more significant sales ultimately.
Cons of Buying into a Franchise
- Freedom of creativity will be limited in terms of incorporating your ideas into the business.
- As compared to buying an existing business, you will not be enjoying the maximum profit margin.
- Risk of loss. If the franchise were to fall, your business would fall with it.
Advantages of Buying an Existing Business
- It unquestionably guarantees you complete ownership of the business, and no additional charges are paid after the purchase.
- You’ll have control over the business from all angles, including the choice of suppliers to maximize your profits.
- One enjoys the freedom of creativity in the range of rebranding or marketing, among other aspects.
Disadvantages of Buying an Existing Business
- You have to establish your customer base, which will take longer to create repeat customers as compared to a franchise.
- If you are buying a falling business, you may take some time before generating a substantial amount of profit.
- Uncertainty – you will not be sure when the business will breakeven, or last longer due to external factors that may affect the business.
- The seller may have overpriced the business. Consequently, buying a business is worth its value.
- The seller might sell an existing business with debt, and hence you will be incurring them.
Starting a new business vs. buying an existing business.
As compared to buying an existing business, starting afresh may seem like a challenge, yet be a fun-filled adventure. Starting from scratch may be an added advantage as you will lay the foundations to grow to the levels you want. Additionally, this gives you the thrill of watching the business thrive.
Advantages of Starting a Business
- It is the boss. This means you will manage yourself with no pressure and limitation.
- You get to make your own decisions about the business.
- Freedom of creativity in branding and marketing, therefore, developing your customer base from scratch.
- Enjoying financial freedom as you will be receiving all the profits the business makes.
- Being that you are the sole owner, you get the privilege of hiring and firing according to your terms.
Disadvantages of Starting a Business
- In case of losses, you bear the burden alone.
- Limited capital to spearhead expansion and diversification.
- Decision making will be affected as there will be only one decision-maker with no critics and options.
- Strong competitors will give you a run for your money as they are more established and have more massive customer bases.
Buying A New Business Checklist
To keep everything organized, you need to make a checklist. The business buying process is not straightforward, so the list will help you keep everything organized. Here is a quick and effective index that we have created for you.
- Identify the type of business you want to buy
- From Where to Buy?
- The kind of investment you have
- Infrastructure required.
- Growth potential
- Legal process
- Sealing the deal
Identifying the Right Type of Business to Buy
This is the most challenging part of the process. This is because it requires you to go into the market to look for a business. You will have to find a business that aligns with your set goals and objectives. The type of business will help you determine its market scope and identifying potential competitors. This information will be vital in laying the business plan and strategy foundation of the business.
Identifying the type of business will also guide you in defining the market position for the company. Additionally, it will show the assets of the company you intend to buy as well as its liabilities if it has any.
Where Can You Buy an Existing Business From?
Businesses for sale are not hard to get if you know where to look. Below are some of the areas you will find listed companies for sale:
- Business Magazines
In this category, businesses for sale will be found here in these magazines. They show how businesses are faring in their financial quarters, and the potential to buy shares.
This technological marvel shows businesses for sale online. With just the click of a button, you can see all businesses set for sale all over the world. You can also buy an online business if all the legal works have been completed.
They have been at the forefront of bringing news to everyone. You will find classifieds mostly at the back of many newspapers. This is where you will find a business for sale. On the other hand, you may find a company has been gazetted for sale at the front.
- Trade Publications
They have comprehensive details of all businesses. They can be found either online, magazines, or even in newspapers.
These can be people who are in your circle. They can be referrals who know your business hunting, and they may assist you in brokering the deal. Most of them have inside information that can help purchase a business, though you need to take caution as not all brokers are genuine.
The kind of Investment You Have
Your budget will be your investment driver. Your sources of capital will matter a lot. Many sources will need comprehensive business plans or other requirements before they consider loaning or giving you the funds. Your funds will also determine whether it will be worth buying an existing business vs. franchise.
Lawsuits, debts, current assets, and liabilities the company owns are some of the facts you need to factor in when making your investment.
- Personal Savings– notably, this may be one of the most preferable methods, since you will not have the burden to repay anyone.
- Friends and Family Support – Like your savings, this is an excellent way to finance the purchase of an existing business. Needless to say, if they give you a free will, then you luckily have nothing to give back, but in case some of them give it to you as a loan, you enjoy the benefit of repaying slowly, without pressure.
- Seller Financing- similar to higher purchase, this is when the seller agrees to let you make partial payments with interest on top of it.
- Loans- whether from a Sacco or bank, loans can drive you forward towards finally owning your own business. You will, however, have to adhere to the set rules and regulations.
- Selling the Business Shares – surprisingly, this is an intelligent way to source funds. Selling shares to the public or the employees would generate a substantial amount of capital.
- Business Partners– drawing up a partnership is as well a good idea. This eases the burden of the overall costs. Hence, creating even more capital.
The Infrastructure Required
Incorporating new ideas into old ideas will be a difficult task. Transitioning will also be hectic, considering that not all structures of the business will be redone at the same time. Bringing new equipment, personnel, and ideas into life, and implementing them will be an expensive thing. This will also be affected by the kind of investments and funds that are at your disposal.
What you also need to factor in is the old infrastructure. Does it marry your goals, and can it be used? Can it even be salvaged and used in your new business without any hiccups? After purchasing the existing business, you shall need to re-evaluate whether or not you will need the current employees or slash some of them.
How much ROI (return on investment) are you forecasting? It would help if you benchmarked where the company should be within a period and how capital intensive it will be. This will be guided by the strategic goals and objectives laid to achieve the desired results.
This is where you involve the relevant authorities of your intent to purchase the existing business. You shall need the legal documents to be adjusted to your needs. Assessing and evaluating the potential business for purchase will be done at this stage.
The following are the legal factors you need to consider:
- Permits and licenses – These are the documents that show that the business is legally allowed to operate. All the papers should be up to date with the current laws and statutes governing the given business to be bought.
- Letter of intent – This is the initial letter sent to the buyer by the seller, which states all the assets and liabilities to be included when purchasing the business. It will also have the terms and conditions of the sale.
- Zoning law – These are the laws that govern the location of the existing business for sale. The business must adhere to these laws, especially considering commercial and residential areas.
- Environmental laws – They indicate which rules are to be followed when it comes to the environment—for example, dumping and drainage systems.
- Contracts and leases – You will need to cover all and any agreements the business had with either the landlords or suppliers. You don’t want to be caught off-guard when debtors come knocking for dues you don’t know about.
- Financial statements – Due diligence will be required. You may need to include an auditor and lawyer to ensure that all the documents are in order. double-checking the financial statement will help determine if the company was paying taxes or whether the business is financially stable
Sealing the Deal
Now that you are done with the hard part sealing the deal is the most crucial part. At this stage, you will need your attorney close by when signing and agreeing to terms. All information collected and provided will need to be available to all the parties, hence ensuring transparency.
The process followed before sealing the deal.
- First and foremost, the buyer will need to have done his homework. Due diligence is done to ensure that the business will be of value.
- Secondly, the buyer will need to liaise with a lawyer to approach the seller. It is wise to note that the buyer should use the process advertised by the seller. At this point, the seller will check out if you have the requirements asked for the sale of the business.
- The buyer presents the seller with a letter of intent. The message will contain the price, terms, and conditions, the deadline for closing the deal, and any other detail that may be of use to both.
- At this stage, if the seller and the buyer have agreed, a draft of the purchase agreement is drawn. It signifies the final decision for the sale of the business and at which price they’ve both agreed on.
- Finally, after all it has been said and done, the last part will be signing the contract. The buyer will need to produce a payment, and they both shall sign the purchase agreement. The signatures will mark the final sale of the business, and the buyer will have all the rights. The document will be known as a bill of sale after the signing.
It is a good practice to sign a non-disclosure agreement if need be so that any secrets and information remains proprietary. On top of that, a non-compete agreement is also given to the seller. This ensures they do not open a new business right next to your new business.
The decision to start, franchise, or buy an existing business is a milestone by itself. Moreover, you have to put in some thought and research for you to be able to make the right decision. It is safe to say that all the above choices are the right choices. But because only one choice can be made, my advice would be to weigh which may suit you more and probably align with your experiences and skills for further development.