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Challenges of Buying a Business

Buying a business can be one of the most important decisions of a lifetime. Running a business is a risky job for an entrepreneur. To reduce his risk he has to buy a business that is already demonstrated an ability to successfully operate. That confidence does come at a price, though, as you will generally spend far more to buy a business than to start one from scratch. If you have got the funds, though, it's an excellent option.

Buying the perfect business starts with choosing the right type of business for you. The best place to start is by looking at an industry with which you are both familiar and which you understand. Think long and hard about the types of businesses you are interested in and which best match your skills and experience. Also consider the size of business you are looking for, in terms of employees, number of locations and sales. Next, pinpoint the geographical area where you want to own a business. Assess labor pool and costs of doing business in that area, including wages and taxes, to make sure they are acceptable to you. Once you have chosen a region and an industry to focus on, investigate every business in the area that meets your requirements.

Buying an existing business or established franchise will dramatically reduce the risk when compared with startups since statistics estimate that 60% of start-up businesses fail within the first three years. Additionally it takes two years on average for a start-up to become profitable. Even comparing start-ups with such other options as home-based businesses in most cases, your chances of success are still clearly best when you buy an existing business.

Outlined below are the primary advantages and disadvantages of business acquisition vs. start-up:

  • Business generates cash flow from day one preferably positive cash,
  • Much lower risk of failure,
  • Established suppliers,
  • Established customer base providing referrals and references,
  • Immediate credibility and perception of success,
  • Trained employees in place,
  • Proven business concept and processes,
  • Seller likely to lend support and may assist with financing,
  • Easier to secure affordable financing to complete the acquisition
  • Proven products, services, marketing and sales strategies,
  • Many of the problems will have been discovered and solved already.

Disadvantages

  • You often need to invest a large amount up front, and will also have to budget for professional fees for solicitors, surveyors, accountants etc.
  • You will probably also need several months' worth of working capital to assist with cash flow.
  • If the business has been neglected you may need to invest quite a bit more on top of the purchase price to give it the best chance of success.
  • You may need to honor or renegotiate any outstanding contracts the previous owner leaves in place.
  • You also need to consider why the current owner is selling up and how this might impact the business and you taking it over.
  • Think about the feelings of current staff - it's possible they may not be happy with a new boss, or the business might have been run badly and staff morale may be low.
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