Buying an existing business can be similar to solving a jigsaw puzzle in the sense that many pieces of information need to be gathered for a complete assessment of the business. It’s important to fully understand the history of the business because it will influence the future of your potential new company. You might be at a crossroad and in the process of making the decision to either build up your own business from the ground up or purchasing an established company. Both have advantages and disadvantages. We will take you through all the reasons why buying an existing business is a good way to go.
Why would anyone sell a well running business?
Before diving into the motivations for buying an existing business it’s good to first look at why a business owner would sell its blood, sweat, and tears. Because if it’s such an established company, why sell it!? Let’s get it out of the way that businesses are sold at a point where they are not doing well. This is the biggest misconception about why anyone would sell their business. Reasons for selling a business are numerous but, in our experience, we see that it often happens when the business owner moves into a different life stage or is in need of a lifestyle change that is not supported by their business. Another reason is that there are many entrepreneurs out there who like to start a business but once it’s up and running they get distracted by new ideas on which they rather focus. Some people are easily bored and don’t find challenge in diving deeper, they just want to broaden their horizons and challenge themselves in different ways.
1. Buying an existing business means a proven track record
By definition, if a business is established, then the concept has worked at some level in the past. It is, for this reason, that financing a purchase is often easier than securing funding for a startup. And not only has the business a financial track record, but it also has built up a reputation and has functioning processes that keep the business running.
2. Relationships: suppliers, customers, and staff
The strength of the customer or vendor databases often dictates the value of a business. It’s very common for the seller to stay on and transition with the business for a pre-defined time to transfer the relationships to the buyer. There is a good reason for that. Building up strong relationships with suppliers, staff and reoccurring customers can’t be forced. It takes time to build solid relationships that are founded on trust. Solid relationships lay the fundament for goodwill which is one of the four key aspects that buyers need to look out for when purchasing a business. In short: relationships in a business decide if a business is sellable.
3. Focus on change and growth
When starting a new business, you will find yourself losing a lot of time laying the groundwork. Time and money are spent on acquiring basic items such as computers, telephones, and furniture, which does not directly result in increased cash flow. Also, processes need to be layed out, people need to be trained, mistakes have to be made before a solid foundation is established. Whereas when buying an existing business all the groundwork has been done and processes are running. This makes that you are able to hit the ground running and put energy into growth and improvement.
4. Employees represent the business
Alright, we know we briefly mentioned employees above under ‘relationships’ already but really, the staff is key. They deserve your attention as they one of the most valuable and important assets you’re buying. Employees that were chosen by the seller have been trained to represent the business and its culture. The fact they are already ingrained in the business makes it easier for a new owner to implement growth strategies. Also, maintaining employees will avoid confusion with customers and keep the trust relationship intact.
5. Cash flow is secured
The sale of a business is usually structured so you can cover the debt service, take a reasonable salary, and have some left over to take the business to the next level.
In contrast, some experts say start-ups aren’t expected to make money for the first three years.
The value of a business usually relates to expected returns as well as the level of security.
For instance, a business regarded as “very safe” may fetch a high multiple of earnings while “less safe” businesses may sell for a lower multiple of earnings.
6. You’re buying an established brand
As with a customer database, a brand can take years to establish. The recognition it provides within the business community means a new owner can benefit from any networking or marketing conducted by his predecessor. Unlike the cold calls from startup companies, which often carry an explanatory tone, calls from a recognized brand come with a level of understanding.
7. Less financial risk
The IBBA uses an example of a business buyer paying $1 million for an established business with strong cash flows of approximately $200,000 to $300,000. A lending institution funds the transaction because historical revenues show the cash flow can support the purchase price.
This could be seen as less risky than taking out a $300,000 loan with an unproven concept and projections that may or may not be realized.
Buying an existing business with GMO Business brokers
Have you come to the point where you’d like to follow the next steps on the path of buying an existing business? At GMO business brokers we have a broad range of businesses for sale in Perth and beyond. With our years of experience in successfully selling a business and buying a business, we are confident to answer any questions you may have. You can contact our office on (08) 9481 4422. Our business brokers each have their own specialty and are more than happy to discuss the industry of your interest or help you to discover the industry most suitable for you!