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Five questions to ask yourself before buying a business

by Guest on February 18, 2013
Business

Getting a toehold in the world of business can be a daunting prospect.

Taking over an existing business is often a lower risk, albeit more expensive route into business than starting a venture from scratch, but how do you get started?

Here are some of the questions you should be asking yourself before you embark on a search for your dream opportunity.

1. Is buying a business my best route into business?

There are several compelling advantages to buying an existing operation. Everything is already in place, from key employees and a client list to physical assets like premises and equipment.

Moreover, so long as it’s a successful business – and you should appoint an accountant to examine its trading history – you’re also buying yourself an income. Whereas most start-ups take time to even break even, a thriving going concern will generate profit from day one.

But if you’re starting from scratch, you can start small and build your business in step with your experience.

Admittedly, the stakes are high in a business’s formative stages, when cash flow is usually tight and every decision is fraught with risk.

But at least they’re your decisions and no one can question your right to make them. Stamping your authority on an established business, where staff have been used to doing things a certain way and regular customers have certain expectations about the product or service, can be challenging.

The price of an income-generating asset with an established brand, customer base and physical assets is, unsurprisingly, generally higher than the total costs associated with launching a small start-up. Small wonder then that the average age of a business buyer is as high as 46 (according to a survey conducted last year by BusinessesForSale.com), given how cash and asset wealth tends to grow as people get older.

2. Which sector?

Experience naturally gives you an advantage in a sector. However, if you have limited business experience generally, or want to switch to an industry in which you have little direct experience, then you shouldn’t necessarily be discouraged.

A business partner with a background in the industry can help enormously.

Think about your interests and hobbies. A sector you’re really passionate about will keep you driven and enthusiastic through the hard work – and enthusiasm goes a long way, especially in adversity. Analyse your skills and strengths and decide where they could best be put to use.

You may be less concerned about the nature of the work than its resilience in a recession. Fields seen as comparatively recession-proof, such as food retail or bargain stores, are more attractive than ever given the perilous economic climate.

Your financial situation may also be a consideration. Businesses in some sectors command a higher price than those in others, so choose a market you can afford – or are willing to re-mortgage your home for, should it come to that.

3. What, if any, professional help do I get?

It can be difficult to objectively assess the worth of a business, especially if you’re unfamiliar with the sector or new to business altogether. Hiring a business broker or an appropriately qualified accountant to independently value a business is therefore wise.

Their negotiating skills and knowledge of the legal process should also ensure any deal runs quickly and smoothly. You may, however, enlist their help for a valuation services alone to keep your costs down.

4. How will I raise the funds?

Few buyers have sufficient cash to purchase a business outright. Armed with the relevant facts about the business you plan to buy and your plans for its future, it’s time to approach a third party for a loan.

It’s usually easier to raise funds for an acquisition with a proven track record than it is for an untested start-up.

A bank loan is the most obvious option, but there are alternatives, including private investors, business partners and peer-to-peer loan websites like Zopa, which connect borrowers and lenders. Only 39% of prospective business buyers expect to need a bank loan, according to a BusinessesForSale.com survey conducted in 2012.

One in 10 buyers hope to use seller financing, whereby the seller accepts part of the sale price in instalments. Effectively substituting the bank with the seller, seller finance has become more extensively used since the credit crunch made conventional loans difficult to acquire, according to 67% of business brokers around the world.

5. How do I start looking for businesses to buy?

Word of mouth is often the best way of finding businesses for sale, but if you’re new to the sector then that may not be an option.

As soon as you have established an approximate budget and the features your ideal business would have, you can tailor searches accordingly on BusinessesForSale.com. Filtering according to sector, location, sales revenue and a host of other variables, you can browse matching adverts and issue enquiries to the seller or their agent via a contact form.

Finally, if you’ve found your dream asset but it isn’t currently for sale, you have nothing to lose by making an offer – they can only say no.

Adam Bannister

By Adam Bannister, managing editor of BusinessesForSale.com. Adam also manages content for other titles in the Dynamis stable, including FranchiseSales.co.uk and BusinessWings.co.uk, as well as being an occasional contributor to the Huffington Post, Talk Business magazine and Start Your Business Magazine.

Featured Image: Victor1558

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