Should you buy that business?

Getting a start in business can be difficult, it may mean putting in long hours and fighting for relevance in a crowded market.

There is another way, and while it may not be for everyone there can be a lot of upside in purchasing a business where someone else has already put in some of the hard yards. In this article I’ll look at some of the good, the bad, and the ugly of buying an established business, and provide a few tips for those considering taking the plunge.

The Good

It’s easier to assess viability. One of the biggest challenges when starting a business is ensuring that your business is viable. In simple terms, will it survive in the long term? One of the things that makes assessing viability for start-ups so difficult is that almost everything is an assumption. You might have an idea of costs but knowing how much you can sell your products and services for and finding that delicate balance between margin and volume can be like staring into a very cloudy crystal ball. With an existing business you have far fewer unknowns to deal with.

There are ‘some’ shortcuts. We often hear ‘there a no shortcuts’ but in life we know that’s just not true. Those of us that live in Sydney have become accustomed to the choice of money vs. time when it comes to our toll roads (don’t get me started), but the choice is a genuine one. When considering your business plans it can be very worthwhile to look at how much time and money has already been invested in the business that’s for sale, and how much value it has to you in not having to do all of that. Every customer on the database, every product refinement, every costly idea that’s already been tried and which yielded valuable lessons, are all there for you at a known cost.

Cashflow is king. You’ve probably heard the term, cashflow is the lifeblood of a business. Truer words are seldom spoken. When starting a business from scratch it can be a huge drain on resources and it’s important to ensure that you have sufficient reserves to support yourself and the business whilst it gets to its feet. When buying a business however you can gain access to an immediate flow of cash. This cash can be used to pay wages, buy stock, and even to service debt (like a loan to buy a business).

Obtaining Finance may be easier. As I mentioned before, one of the challenges with new businesses can be all the unknowns where assumptions must be made. I can tell you that the people employed by banks and finance companies to make lending decisions love data and generally aren’t that keen on assumptions. When you buy an existing business, you’re able to provide a lot of data, and often a lot of comfort about the viability of the business. You’ll still need to inject some of your own funds, but you may be surprised just how much you can borrow to fund your business aspirations.

The Bad

Learning curve. If you didn’t build it, it may take you a long time to figure out how it all comes together. One of the advantages of starting a business from scratch is that you can control and understand every aspect of it, lessons learnt are burned into your memory (both good and bad). When you buy a business it’s rare that you get a complete set of manuals that tells you how the whole thing works. The bigger and more complicated the business, the more important it is to have documented policies and procedures for everything that generates revenue.

Secret Sauce. Sure the Colonel’s eleven secret herbs and spices can be found on the internet (supposedly), but there are often things in a business that only a select few really know. When you buy a business, it pays to examine the complexity of the products and services provided in detail. The last thing you want to do is pay a lot of money for the pots and pans and find the recipe for the secret sauce isn’t written down anywhere.

Relationships trump almost anything. As a rule, people do business with people that they like. I’m not suggesting for a minute that you’re not a likable person, but it is important to consider the relationships of the outgoing business owner, not just customer relationships but also supplier relationships and internal relationships with key staff. Look deeply at all of the key relationships required to make the business tick and consider the impact that it could have if those relationships don’t gel well with your new ownership

Under new management. We’ve all driven past a business and seen this sign. It’s put up loud and proud when new owners perceive the reputation of the outgoing business management was less than stellar. Conversely, we’ve all seen those reviews that start with ‘the new owners came in and…’ For this reason it pays to make sure you have the necessary experience and expertise to run your new business acquisition, after all you personally may have missed out on many of the lessons learned by the previous owners.

The Ugly

Liabilities under the rug. There’s a reason that so many business sales involve the sale of the company’s assets and not its shares. When you purchase a company (rather than the assets of the company) you take on both the assets and liabilities of the entity. This can include historic liabilities like tax or payments due to staff. Purchase structure is a very good thing to pay for quality advice on, and it pays to look under the rug to make sure you’re not buying things (liabilities) that you don’t want.

It’s all very restrained. I mentioned relationships before, and restraints-of-trade are one of the ways that people protect themselves when buying a business. A restraint is a contractual term that stops the seller of a business from simply setting up again around the corner under a new name, and it’s far more common than you might think. You’ll want to make sure that the seller has appropriate restraints on what they can do and for how long to ensure that you protect your investment.

Don’t buy a trick from a magician. A lot of ‘magic’ is accomplished by getting us to focus on something, a glamourous assistant for example, while the magician takes advantage of our being distracted. Unfortunately, not every business seller is 100% forthright, or perhaps in many cases may not volunteer information that they don’t have to, particularly if it might negatively impact the business sale price. 

To sum up, buying an established business can be a time saver, it can get you on the road to revenue and profitability faster, but it’s not without its pitfalls. In the end only you can decide if a business purchase decision is right for you, but here’s a few tips to help you along the way while you’re looking.

• Get professional help. The business broker, lawyer, and accountant working for the seller are not there to help you. If you must choose one, start with an accountant that specialises in business purchases whilst doing your due diligence, and work with a lawyer at the end on the sale agreement.
• Play to your strengths. You’ll always be safer buying a business in an industry you understand. If you’re coming in as a generalist investor make sure you’re acquiring subject matter experts in the business or recruit them from outside if necessary.
• Check everything. Look at every line in the financials and cross-check information. The financials for the business should match the bank statements, as well as things like tax history / BAS.
• Don’t neglect culture. Take any opportunity offered to talk to existing staff (even if you have to make up a story about being a consultant or something). The more insight you can gain into business culture before a purchase the better.
• Ask why. Delve into the reasons behind the sale and don’t just take it at face value. People move, retire, or get burnt out by a particular industry. There are plenty of valid reasons for selling, but there are also reasons that are red flags, everything from competitors about to open up to new regulations could be a reason for sale (and a big headache for you as purchaser)