Buying an established business rather than starting a new business can be a good option for many potential business owners. Established businesses come with an existing customer base and are already trading. However, you may also inherit any problems that the business has. You need to know exactly what you’re signing up for, and be clear about your ability to run a business.
Buying a business is a complex and time-consuming process. You will need to investigate in detail the business you plan to buy, making sure it is feasible and has a well-developed market for its products or services.
You will have to check business records, plans and operations, and familiarise yourself with your competitors and the industry. You will also need to check that the business has the appropriate licences, permits and registrations and find out which ones can be transferred to you.
Buying a business is a serious investment. You should always seek professional legal and financial advice before signing any documents.
Buying a business is generally considered less risky than starting your own business, especially if you can buy a well-managed, profitable business for the right price. Consider these advantages:
- The difficult start-up work has already been done. The business should have plans and procedures in place.
- Buying an established business means immediate cash flow.
- The business will have a financial history, which gives you an idea of what to expect and can make it easier to secure loans and attract investors.
- You will acquire existing customers, contacts, goodwill, suppliers, staff, plant, equipment and stock.
- A market for your product or service is already established.
- Existing employees and managers will have experience they can share.
Buying a business is a significant investment, so you need to sort out your finances early and be well prepared and professional when applying for a bank loan or approaching potential investors. This will give them confidence to back your business and convince the seller you are serious.
When checking your finances, consider:
- the purchase price of the business
- transfer (stamp) duty, usually payable by the purchaser
- the working capital requirements for your business (your cash flow projections will show that figure)
- professional fees and charges related to the purchase
- any loan repayments and servicing costs, if applicable
All commercial lenders use the following criteria to assess loan applications:
- your ability to service loans (interest and periodic repayments)
- security (most banks require a 1st mortgage on real estate security and may lend up to 65% of the real estate asset being offered as security)
- the management and business skills of the borrower
- the trading history of the business (at least three years prior to purchase)
- the profit and loss and cash flow forecasts for three years (forecasts need to be supported by realistic assumptions about future trading).
It is important that you are able to supply the necessary information to the lender assessing your request.
Remember, every funding proposal will have its own unique features. Therefore, you should seek professional advice from your accountant or business adviser about the best way to organise funding.