The main advantage to buying a business in theory, is that as soon as you have taken ownership, you can start making money. This route is particularly well suited to people who have extensive experience of general business management but lack detailed technical or product knowledge.
When you buy an established and profitable business, you will not only pay for the basic assets of the business, but also the accumulated time and effort that the previous owners spent growing it to its present state. This extra asset is called the ‘goodwill’ of the business. The better the business, the more the ‘goodwill’ will cost you.
There are mainly two ways to find a business for sale: either by finding a company that has been advertised for sale or by searching out a compatible business, where the owner may not have actively decided to sell. In the first instance look in the Small Business pages of the main broadsheets and local newspapers. Otherwise business transfer agents and estate agents are a good place to look.
Advantages and disadvantages
- You will buy some of the experience and expertise you do not have. Nobody can be expected to know how to do everything. It is much easier (and cheaper) to learn from other people’s mistakes, rather than making all these mistakes again yourself.
- If your new idea needs to be marketed to specific target customers, buying a business dealing in related goods or services will give you both access to your potential customers and the credibility of a trading history, when you seek to launch your new product.
- Buying an existing business can be a way of gaining access to your chosen market if that market has barriers to entry that would be too difficult or costly for a start-up to overcome.
- Identifying the right potential acquisition and negotiating purchase can take a long time, especially if you don’t succeed at your first attempt.
- The professional fees associated with buying a business can be very significant. Good solicitors and accountants are a necessary cost in this process. They will ensure that you know exactly what you are buying.
Guard against risks
Make sure you know why the existing owners are selling. If it is because the business is sick, are you sure you can cure it? Make sure you know exactly what you are taking on. Get indemnities from the previous owners to protect against hidden liabilities. Check that the previous owners have sufficient assets to cover those indemnities should you need to enforce them.
Don’t pay the complete purchase price immediately. Get the price linked to continued profitability of the business, part of it being paid when future profits are determined. Make sure the agreement prohibits the old owners from setting up a new, identical business on your doorstep. Prevent them from contacting old customers.