Bargains at the lower end: How to buy a business

Starting a business doesn’t always mean starting from scratch. Often, getting an establishd smaller concern will better suit your aims. By ANDREW KENT.

By Andrew Kent

It is commonly known that most new businesses fail within the first two years, and yet people continue to choose to start their own business rather than buying a going concern.

While this may be the only option if you are doing something that has never been done before, it is certainly not the case for most businesses.

Ideally you want to buy a business for less than it would cost you to create one, and one in which your input can have an immediate positive impact. These opportunities are easier to find than many people think.

Owner-operated businesses have their own lifecycles of establishment, growth, plateau, and eventually decline.

Buying a business in the later half of its life-cycle can provide great opportunity to add value, provided you can get in while the customers are still happy. With many of the baby boomers entering their retirement years, there is likely to be a continual stream of these opportunities for the next five to 10 years.

A quick look at the major hurdles for new businesses also clarifies why buying a business can be a better way to go. Here is what I regard as the top five:

1. Establishing a customer base.
2. Internal systems and procedures.
3. Market awareness and credibility.
4. Premises and staffing.
5. Cash flow.

I have no doubt that the top three are the reasons why franchising is such a growing industry, as this is generally what a franchise is offering. However, if you are opening a new franchise then in many cases you are still going to need to tackle the number one hurdle: establishing a customer base.

If you are seriously considering a potential purchase of a business, ask yourself not only whether the business already has these things, but also how you could ensure that they would continue to exist when you are in charge.

One of the ways of doing this, particularly in a service business, is to have a “work-out” clause in the transfer. This requires the existing owner to continue to work in the business for a nominated period of time to ensure that the intellectual property, staff and customer loyalty are all smoothly transitioned over to the new owner. Although it is always a good idea to meet the owner first, you may not want to spend the next few months working with them.

Also remember that price is not the only thing you need to negotiate. It is essential to understand how the business works, and what is required to keep it working. Only then can you ensure that these things are appropriately covered in the transfer of sale contract.

One other thing to watch out for is any outstanding debtors – including tax and superannuation liabilities, as these will come with the business. I recommend you read the fact sheets on the business buying process at the BizExchange website. It could save you a lot of time and trouble.