Do you dream of being your own boss and running your own business but feel overwhelmed at the idea of starting from scratch? Or perhaps you have the entrepreneurial spirit but are lacking experience or that golden business idea? The good news is, you don’t have to create a business to own and run one… you can buy into an existing business! Starting a business from scratch takes a lot of time and energy, meanwhile, there are thousands of existing businesses on the market which are already up and running, waiting for someone new to take the reigns. So, what’s the deal with buying into a business you ask? Keep scrolling to find out…
Why buying into a business?
Buying into a business can be an extremely exciting and profitable venture and there are a number of reasons why taking this route is preferable to starting your business from scratch.
By buying into a business, you are ensuring that from the beginning you have several important components already established. Existing businesses bring with them existing clients, cash flow and procedures meaning that there is already a decent amount of momentum behind the venture. Sure, you might want to make some changes but the most difficult part is already over and the labouring job of getting the business off the ground has been done for you. Choosing the right business to buy into is, of course, extremely important; Get it right and you will have the perfect framework on which to build your dreams!
The orientation processes
Whilst buying into a business can be less risky than starting your own, not every business is a guaranteed success and there are several important things to consider to ensure that you make the right purchase. Along with existing clients and procedures, the business you choose to buy into will also have an existing reputation and relationship with customers and investors. It will have a whole history that comes with its price tag. It is your responsibility, and in your best interests, to make sure that this history works for you and not against you and to take the time to orientate yourself well when it comes to looking at potential businesses and markets.
Not sure where to start? Employing a business broker is a failsafe way of ensuring the process is smooth and that every potential issue is considered before you sign on the dotted line. In the meantime, however, we’ve put together a list of 15 things for you to think about when buying into a business.
1. Why is the previous owner selling the business?
There are a number of reasons why a business owner might choose to sell their business and as a buyer, this is one of the first questions you are going to want to ask about the business you are potentially buying in to. It could be that the seller has tired of the entrepreneurial lifestyle and is looking for a change, or perhaps now that they have made their ideas a success they want to move on to a new challenge. Many business owners sell for personal reasons that are nothing to do with how the business itself is doing. That being said, it is always important to investigate selling motives; You don’t want to risk buying into an under-performing, badly located or financially implicated business!
2. Understand the business’ history
Understanding the history of a business is important for a few reasons. Firstly, the history and the reputation of a company are tied up together. The history of a company can tell you about its previous motives, successes and losses and also, the general spirit and focus of the business.
What is the ethos that has been built and maintained over the years? Is it one that you agree with? How has the business been received by its client base and employees? Is the reputation that has already been established one that you can work with?
Secondly, Looking into the history of a business can tell you a lot about the best ways to move forward. It can indicate its future potential and of any changes that may need to be made to optimise that potential.
3. Trends in the business and the market
When buying into a business it is important to do your market research. What is true for start-up businesses is also true for existing businesses: If there is a declining market for your product then it’s a no go. Only looking at the history and internal workings of a business is not enough to know if it has sustainable potential, you need to be clued in on the external factors as well. Choose an industry that you feel passionate about, yes, but also be sure to choose wisely regarding whether or not the rest of the world shares that interest. Can you see a long term future here? Is there still going to be a demand for your service in the next 5-10 years? Take some time to check out the trends of both the business and the market to make sure that you are investing in a business that is going to stay afloat long term.
4. Fixed and variable costs
You’ve probably already spent a fair amount of time thinking about the income you can make by buying into a business, but have you considered the outgoing expenses? Typically these will fall into two categories: fixed or variable. You are going to want to get a good insight into both before investing in a business. Fixed costs are the outgoings that remain constant, regardless of the volume of production; They include things such as rent, insurance and employees salaries. Variable costs, on the other hand, will change depending on production output; The higher the production rate, the higher the costs. This typically includes things such as raw materials and sales commissions. Investigating and analysing the expenses of a business is an important part of deciphering if the business has the potential to bring you the profit that you want.
5. Is the business profitable?
Having done your market research and investigated the outgoings of your potential business, you should have a clear idea of whether or not it is going to be profitable. If figures aren’t your strongest area or you feel overwhelmed by information, employing a financial advisor or business broker is a good idea. Whether you are a play it safe entrepreneur looking for a secure deal with minimal risk, or more of a bold adventurer looking to buy a cheaper business to develop and rise to the top, it is essential that you have a clear picture on the current financial situation of the business. Knowing where you are starting from is a key component in moving forward.
6. Business assets
The term ‘business assets’ refers to the resources or items of value that a company or business owns. When buying into a business, it is important to have a clear idea of which assets you will be buying along with the business and what implications might come with them. The questions that need to be asked regarding assets are plentiful and vary from business to business. Checking if you will have full legal ownership over the key business assets is essential, as is ensuring the protection and registration of any intellectual property. If expensive equipment or technology is an asset of the business are there warranties or guarantees? What key information do you need to know regarding contracts that the business has with its suppliers or customers? Investigating assets is as important as investigating the business itself as they make up a big part of the value of the business!
7. Inventory that comes with the business
As well as assets, when you buy into a business it will often have a certain amount of inventory that comes with it. Inventory is the ‘stock’ which is held by the business, good inventory control is essential to running a business just as a good understanding of existing inventory is essential when buying one. Is the inventory saleable or obsolete? Is it enough to get you started or do you need more? The balance is important here: excess inventory could mean financial loss later down the line. Effective inventory control is integral to a smooth running business, so make sure you are starting off on the right foot and you have a clear picture of exactly what you are getting!
8. Business planning
For anyone who is starting up or buying into a business, effective planning is key. Writing a business plan can give you (and potential financial investors) an overall view of your business and an understanding of costs, income and predicted profits.
As well as helping you to manage cash flow, a business plan can help you to set your priorities and focus strategically on your most important steps first. Whether you choose to include marketing in this or to have a separate marketing plan altogether, having your strategies and intended goals down on paper helps to later identify their success and to implement any necessary changes. A good business plan which is regularly referred back to and reviewed can help keep you and your business accountable for the success you expect to have! It will help you to highlight what is or isn’t working and enable you to effectively manage changes.
9. Get a clear picture of the business structure
When you get down to writing your business plan, you’ll want to be clear on the structure of your business and whether or not you wish to keep it as it stands. The structure will determine how you pay tax and also how liable you are personally for the losses or potential legal issues around business transactions. Perhaps the business is everything you want but does the structure support your needs? There are different options to consider, including sole proprietorship, partnerships or incorporated businesses. Each has its pros and cons so do your research and make sure the structure of the business that you are buying into is what you need, or that you feel confident in changing the structure to better suit you. Once again, working with professionals such as business brokers and tax attorneys is a good idea when dealing with this side of things.
10. Which partnerships come with the business
When looking for potential businesses to buy into, it is worth also looking at the partnerships that come with them. Partnerships and collaborations in business can go either way: it is up to you to determine if the partnerships that come with your business are worth maintaining or not. Take time to get to know the existing partners and to determine if they share the same values as you or if there is a clash of personalities and business ideas. Do they seem reliable? Do you feel that you can trust them? If the answer to any of these questions is ‘no’ then there is a strong chance you will face disagreements down the line. A good partnership, on the other hand, could be an extremely positive component when buying into a business. Successful business collaborations can bring about all sorts of benefits such as marketing support, fresh ideas and shared costs. The most important thing to consider when looking into these types of partnerships and collaborations is whether or not it is beneficial to both parties.
11. Liabilities of your future business
So by now, you have probably worked out that when you are buying into a business you get more than what meets the eye. As previously mentioned, along with the business comes its history- this includes things such as liabilities, outstanding debts and refund warranties. When you buy into a business, you become responsible not only for liability claims that might be made against you in the future, but also any claims made about incidences before you arrived on the scene, while your predecessors were still running the show. There are ways that you can protect yourself from having to clean up someone else’s mess, such as getting an indemnity agreement, holding the previous owners responsible for any liability issues relating to the time period before your ownership. First and foremost, however, you should, of course, perform your due diligence by investigating the companies documents and contracts to check for any evidence of human rights complaints, pending or previous lawsuits and that all taxes and debts have been paid.
12. The importance of a purchase agreement
If you are still with us at this point, it has probably become obvious to you that buying into a business involves thinking about a lot of things and managing a number of details. This is why a purchase agreement is so important. A purchase agreement ensures that all the major and finer points are addressed, acknowledged and agreed upon by both parties before the business changes hands. It lays out what is expected of both the buyer and the seller, states exactly what is and is not included in the sale and will ideally also consist of some prohibitive guarantees such as confidentiality and non-solicitation agreements. It will clearly and legally state exactly what you are taking on with the business (assets, assumed liabilities etc.) and will be a point of reference should any issues arise between you and the seller in the future.
13. Tax situation
The tax situation of the business you are buying into will largely depend on its size and whether or not it is incorporated, however, every business comes with some tax implications and it is imperative that you understand these before you buy. Hiring a tax attorney to examine the company’s financial documents is the best way to be sure that you aren’t putting yourself and your future business at risk. Generally speaking, there will be fewer tax burdens to deal with if you are buying into an unincorporated business which is made up mostly of assets. Buying into a corporation may be a little trickier to navigate as there may be tax liabilities on corporate stock and other high-value assets. That being said, agreements can be made and laid out (preferably in your already discusses purchase agreement) to settle such matters.
14. Legal issues
There are, of course, a number of legal issues (many of which have been previously mentioned) to think about when buying into a business. One of the legal issues to consider early on in the process, to avoid it becoming a possibly impeding problem down the line, is the legal agreements on the lease of the business premises. Unless a business is totally location independent it is not advisable to relocate when buying into a business and so, for this reason, you want to make sure that all premises’ that your business will run from have lease agreements that support stress-free transfers. It is advisable to take a look at lease contracts and speak to landlords early on to avoid buying into a venture only to find later down the line that the owner of the premises doesn’t want to sign a lease or plans to make changes that don’t support your business. Get clear on all the details such as how increased rental rates will impact you financially and what the costs of replacing the deposits of the previous owner will be.
15. Managing expectation
Whilst buying into a business can get you up and running faster than starting your business from scratch, as you may now have realised it can still be a lengthy and time-consuming process. Before starting out on this journey, and indeed throughout, it is important that you manage your expectations and stay realistic about what is achievable. Make sure you have all the information you need to form a rational outline of what your expenditures will be for the process and that you are conscious of the time and energy you will need to allocate to different processes. Managing your expectations and working from a place of realism rather than idealism will keep you on track throughout, ensuring that you have the momentum to make it happen and can realise your dream!
Buying into an existing business with GMO business brokers?
With all these things to think about, buying into a business is not a solo job. Compiling a team of people you trust to guide you through the process is what will ensure that things go smoothly and you feel confident about your choices. Here at GMO we can provide you not only with access to our extensive database of businesses for sale but also with all the contacts you need for each stage of the buying process. Our team of professional brokers have the experience needed to assist you in finding the perfect business to suit your goals and your budget and will aid you in navigating the structural, legal and financial issues that may arise along the way. With GMO’s support, buying into your business will be a smooth sailing adventure!