So you’ve decided to become an entrepreneur but you’re not exactly sold on the idea of starting from scratch. Your best option at the moment is to buy an existing business.
Investing your money in an existing business has its advantages and disadvantages. For one thing, you’d need to let go of a fair amount of cash upfront. On the upsides, you won’t have to worry about things such as store locations, inventory, logistics and such.
When you’ve decided to buy a business in Australia, there are factors that you should consider before you make a move.
The Pros and Cons of Buying an Existing Business
If you’re still on the fence about buying an existing business, learning more about its pros and cons can help you make an important decision.
- An existing business means its services or products have already been market tested. You don’t have to worry about whether the general public will react positively to what you’re going to offer as it has already been tested by the previous owner.
- Start up time is greatly reduced since the previous owner has done most of the work by now. For instance, you won’t have to necessarily worry looking for suppliers or hiring new employees. You can now start selling the product or offer the service from the get go. This doesn’t mean that you won’t be establishing new changes like upgrading equipment or setting new protocols, but at least the groundwork has been laid out for you.
- Let’s say you want to own a coffee shop. If you were to start from scratch, how do you think you’d fare in a market that’s crowded with established brands? With an existing business, one that is profitable, you know that its brand has been around long enough to make its mark on the market.
- An existing business can actually help you secure additional financing if you need one. A lender will be able to check on the business’s financial statements and decide if you have a viable business. If the business is doing well, the lender can see that lending money to you will pose a lot less risks.
- Another thing about existing businesses is that they already have a customer base that you can tap into once you take over, whereas a start up business owner will have to put the brand out there for it to be recognisable.
- Initial cash out might be hefty when you purchase an existing business. Remember that you are buying the whole package (literally) and if the business is thriving, its owner will most likely ask for a sizable amount. A start up may require less money from you in the long run, but then again you’d begin from scratch, and time is money. If the owner is selling business at an affordable price or less than you expected, you should do some research. A brand that has a bad reputation can be hard to manage and you should ask yourself if its affordability is worth taking a risk for.
- You might have to make some big changes. From the outside a business might be doing well but you won’t have an inkling about its goings on until you’re in it yourself. Once you have taken over, it’s easy to think that you can run the business smoothly but there are bound to be issues such as high employee turnover, outdated equipment, and cash flow problems and debt.
- Unfortunately, there is the possibility of getting scammed when you buy an existing business. The owner might not have been forthcoming about some aspects of the business, such as misrepresented financial data. It is best to review documents with a lawyer before taking a leap.
- Running a business doesn’t just take time and money, but it also requires an emotional investment. When you’re buying an existing business, you’re taking over someone else’s blood, sweat and tears which, at the end of the day, can affect the way you feel about the business. Feeling like the business is “yours” will take some time, changes, and money. If this will be an issue for you, then it is best to simply wait until you can start a business on your own.
How Much Will An Existing Business Cost?
There are factors that affect a business’s selling price and the owner will most likely take certain things into account, such as sales, costs, assets, liabilities, and such.
Once you know how much the business is being sold for, make it a point to do some research and check if the asking price is fair. It wouldn’t hurt to ask an accountant or solicitor for their advice on the price. They’ll be able to tell you if the price is worth it or not.
Make sure that the current owner gives you all important documents before you purchase the business. If they give incomplete information for one reason or another, walk away.
Questions to Ask The Business Owner
Asking the right questions will give you information you need to know before you invest in a business. Here are top questions you need to ask the current owner.
Why are you selling the business?
There could be a number of reasons why the owner is selling the business. No business owner would decide to let go of a business on a whim. Take their response with a grain of salt; ask more questions so you can gauge if the person is telling the truth or not.
How did you reach the asking price?
Knowing how the owner reached the asking price can help you decide if it is fair or not. Depending on the nature of the business, asking price could fluctuate year to year but generally factors such as goodwill, yearly profits, and assets are always taken in consideration. Get an independent valuation too.
Are they open to doing a non-competition clause?
The last thing you want is to have the previous owner start a new company that is eerily similar to the one you’re about to take over. Having them sign a contract stating that they won’t do such a thing will have you worry about one less thing — a potential rival.
What challenges have you faced?
Knowing the risks and challenges the owner has faced can give you important insight on the business you want to buy. No matter how successful a business is, business owners are aware that it has its drawbacks. If they are not willing to share with you their experiences or claim that the business has been smooth sailing since day one, be wary of moving forward.
What happens to existing employees?
Ask the owner if the employees are aware of the sale. If they are, obtain a complete list of the names of the employees along with their duties, salaries, and any bonuses that their contract with the company has stated.
If they are staying with the company, good for you! Having the same employees means the transition can be smooth and help reassure clients that the company is in good hands.
Things You Should Do Before Buying a Business
Even when you are 101% sure of buying an existing business, diving in without being well-informed can hurt you and your bank account. It’s important that you take these steps first:
The type of business you want to buy
Aside from the financial aspect of running a business based on its return of investment or ROI, it is advisable that you buy one that is aligned with your interests. You’ll be happier knowing that you are a proud owner of a business that is related to something you are passionate about.
Understand why the business is for sale
It isn’t enough to know why the business is on the market, it is equally important that you understand it. If the owner is forthcoming about the challenges the business has faced in the past, ask yourself if you are in a position to do something about it and meet these challenges with better solutions.
It wouldn’t hurt to do a little digging: ask around and see if the business has a good reputation in the area. Talking to locals, employees, and customers can give you an unbiased view of the business.
Check your budget, goals, and resources
Money isn’t the only thing you’ll be investing when you become an entrepreneur — time and effort is also spent. Make sure that you are ready to take on a business that you are aligned with in terms of your budget, goals, and resources.
Do your due diligence
Blindly investing your money on a business is like jumping into a pool of sharks — you’ll be able to swim for a while until you get bitten on the butt.
The process of due diligence means that you gather all information about the business before you invest. Doing this with a lawyer and accountant, you can ensure that all documents are in order before taking the plunge.
Before you can begin though, you might have to sign a non-disclosure agreement with the seller. This means all the information you gather shall be kept confidential. This is to protect the seller in case you decide that the transaction is not for you after doing your due diligence.
Hiring a reliable accountant and a business attorney in this process will be for your benefit since their experience and expertise on the matter will help you make an informed decision about the sale.
Must-have business documents
These are just some of the documents that an owner should be able to present since there are a lot of papers that come with a business. Remember that if the owner fails to present one or more of these documents, consider walking away. You may be dealing with a fraudulent individual.
- Business licenses and permits
- Contracts and leases
- Business financials
- Organisational chart
- Status of Inventory, Equipment, Furniture, and Building
- Environmental Regulations
- Zoning laws
By the time you’re done with due diligence and you have enough information about the business for you to make an important decision, then it is time to get into a sales agreement with the seller.
FAQ: If the business is in debt, what happens to it?
This is a very good question to ask. In Australia, businesses can generally fall into two types of sales: stock sale and asset sale.
A stock sale means that the entire business – assets, liabilities, and everything in between – will be passed on to the new owner. Yes, this includes debt. Fortunately, stock sales are for large companies that have an asking price of $10 million or more.
An asset sale is more for small businesses and gives the buyer breathing room. In an asset sale, the buyer and seller can negotiate which part of the business will be part of the contract.
Becoming an entrepreneur has its merits and pitfalls. As long as you are aware of what you are getting yourself into, may it be a startup or taking over an established business, then you should have no qualms about the risks that come with owning and running a company.
JMA Credit has been in the business for decades, helping business owners make informed decisions about their finances and helping with debt collection. We are aware that becoming your own boss isn’t as glammed up as many make it out to be and we are here to assist you in any way we can for things to run smoothly.