Jonathan Jay with Dealmakers

Is Buying a Business a Good Idea? Pros and Cons

For some people, having their own business means starting something from scratch. They have a business idea they’re passionate about, nurture it from the ground up and grow their new venture organically over time. They get a thrill from seeing something develop from a one-person, spare-room venture to a business with staff and premises that provides a good living.

Others don’t want to wait that long to have a business that turns a profit, so they buy an existing business and become the new owner of a going concern instead.

Both are valid ways to be a business owner, an entrepreneur, and society and the economy needs both types to exist. But which is best for you?

Here, we look at the pros and cons of buying a business, to help you decide.

Pros of Buying a Business

There are many advantages of buying a business. Here, we’re going to focus on five.

Easier Financing

Let’s start with what is a chief concern for many people: financing the purchase. After all, you can only buy a business you can finance.

When you approach lenders seeking acquisition finance, a key consideration is, how much money does the business make? You can demonstrate profitability via financial statements. It’s not the only consideration and a holistic view will be taken, but if the business generates good cash flow and has a track record of profitability, you’re already part way to a ‘yes’ on a business loan.

In addition, the business might own valuable assets that can be leveraged to get finance. These might be things like property, plant and machinery, or a good-quality debtor book, a valuable customer base, or intellectual property. All this should be in your business plan.

While it’s true there are more grants, loans and support available for new company start-ups than existing businesses, that type of business might not yet be generating a profit.

A final consideration is the possibility of seller financing – the vendor effectively lends you the money to buy the business by allowing you to defer payment, and you pay them back over time, out of the profits. They will most likely request a down payment, but that’s easier to find than the entire sum.

Proven Concept

When you buy an existing business, the concept has been proven. It has products/services, and customers. It makes money, and has a proven track record of profitability. Future income is predictable. That makes this possibly the easiest and safest way to get into business.

Time and Cost Savings

Starting a business from scratch requires a huge investment of both time and money. Buying an established business means you hit the ground running as all that work has been done. Problems have been encountered and resolved, systems and processes have been implemented and refined, suppliers and customers have been acquired, and, importantly, the business has been shown to be sufficiently resilient to survive. Bearing in mind it has been reported that around 70% of UK start-ups fail in the first five years, that record of business success a massive bonus.

Access to Customer Base

An established customer base is a valuable asset. Starting from scratch is hard work, whereas having an established customer base not only doesn’t stop you actively seeking more, it very likely helps.

Additionally, you have the opportunity to upsell and cross-sell to your customer base, to maximise monetisation. You can also partner with other businesses that sell complementary products and/or services and promote your business to their customers in exchange for allowing them to promote their business to yours.

Immediate Cash Flow

From day one, the business makes money – and that money is yours. Now, you obviously won’t take out every penny and blow it on an Aston Martin DB12, but you do get to make decisions about your reward. And if you have financial responsibilities, a business with cash flow beats a speculative start-up hands down.

Also, as we mentioned earlier, it facilitates financing, whether that be for acquisition, working capital or business growth.

I want to give you access to my complete Business Buying Toolkit so you can discover:

Cons of Buying a Business

There’s an obverse to every coin, and in the interests of balance we’re sharing five disadvantages connected with buying a business.

Lack of Experience

This can hit in more ways than one. Say you go to the bank for acquisition finance; they will ideally want you to have prior experience of buying and running a business. At the least, they will want you to have experience of working in the kind of business you want money to buy. You might have neither type of experience.

At Dealmakers, we’d argue that you don’t need to let your current lack of experience hold you back from business ownership and entrepreneurship. It needn’t be an insurmountable hurdle. Everyone, the biggest business magnates included, has to start by buying their first business. And you are buying a business, not a job! There are people already in the business who will be responsible for the day-to-day operation.

That said, you need to know how businesses work and to operate in such a way that you stay within the law. You also need a working knowledge of how that particular business operates. Happily, there are ways to ensure you gain that knowledge.

The previous owner might be prepared to stay on for a handover period. You can connect with a mentor who has the knowledge you lack. You can hire professionals to take care of things for you – chances are at the very least you will have an accountant and a solicitor anyway. You can conduct your own research and do some networking to make useful contacts. You can connect with peers on social media platforms, such as LinkedIn.

The Business Might Need Significant Investment

An unhappy owner who has been trying to sell for some time might have let the business run down. Similarly, underinvestment over time can result in a run-down operation.

You might find capital investment is needed to address issues with property and machinery. You might find staff morale is rock bottom and you need to invest in team building and training. You might find the business is understaffed and need to start a recruitment drive. The related costs are likely to be in addition to the purchase price of the business.

We’re back to our old friend, due diligence, to help us understand the condition of what we are buying. Asset valuation and real estate surveys are essential, and the results can be used when negotiating price and terms to get something more favourable – and more realistic.

Spend time talking to key people in the business. Get an idea of the climate regarding company culture and staff morale. If people are fed up and you first show you are interested in them and then implement improvements, you can get them on your side (although bear in mind if things have been tough, they might need to see action as well as hearing promises before they pin their colours to the mast).

The key is to make sure you understand what you are buying and budget for any necessary investment. If you see it as a business opportunity, that’s great. If it’s too much, or you aren’t willing to take it on, walk away and focus on something more promising. Aim to find the best business for you.

The Presence of Undisclosed Issues within the Business

It’s true that things can ambush you after completion – disputes with customers, suppliers and staff, outstanding liabilities, faulty machinery and more can all cause problems and cost money. However, that’s what due diligence is for.

Provided thorough due diligence is undertaken, appropriate indemnities and warranties are included in the purchase agreement, and the purchase price and terms are renegotiated appropriately with the current owner, you should be covered.

And if due diligence turns up issues you consider to be too much to take on, you can cut your losses and walk away.

Changing Business Landscape

The one constant in business seems to be change. Technology rattles along at a rapid pace, decisions are made at a macro level that have a knock-on effect on businesses and markets, new entrants to the market regularly pop up and suppliers disappear.

However, a new business start-up is as likely to be affected by those things as much as an established business. There’s nothing we can do about external changes; we have to aim to be sufficiently well informed and nimble to be able to survive.

Reliance on Crucial Employees

Many small businesses are dependent on key personnel. Chances are, if the business owners are fed up and have been thinking of selling for a while, those people have been running the show anyway. And they might be fed up as well.

The danger is, if you take over the business on a Monday and by Friday all your key personnel have left, you won’t have much of a business. As well as the loss of staff, a huge amount of knowledge will have walked out the door.

The key is to mitigate that from the start. Get people involved. Ask their opinion on how things are and how they could be improved. Act on good suggestions.

Also, don’t allow one person to be the sole owner of key business knowledge. Start to get processes and procedures recorded if they aren’t already, so you have a handbook of how to do things in the business. Aim to present them so that anyone can pick up the manual, follow the procedures and complete a task. Implement succession planning for key people, so if one person leaves, there’s another waiting in the wings.

Whatever the condition of the business when you buy it, make sure you have a vision for how it will eventually look. And make sure you protect the business so it isn’t utterly reliant on a few key people.

Considering Both Sides

While it’s obvious which side of the fence Dealmakers stands on, we also acknowledge that buying a business isn’t for everyone. You need to weigh up the pros and cons, and do your own research, before you make a decision, and then you need to make sure you buy the right business for you. After all, your first business acquisition may well be your biggest investment yet.

Conclusion

Buying a business is a big step. It’s essential you understand what is involved in business acquisitions, and weigh up the pros and cons to work out if it’s the right step for you. Everyone’s circumstances are different – people have different responsibilities, different appetites for risk, different aims and ambitions. Understanding how to make an informed decision and what to do if you choose to go ahead and look for a business to buy is where Dealmakers comes in.

Jonathan Jay has helped more than 3,000 people buy successful businesses and become acquisition entrepreneurs, and he has put together the most comprehensive FREE package of business buying resources available today. To get started on your acquisitions journey, download your FREE Business Buying Toolkit now.

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