Top 10 Reasons to Buy an Existing Business
More and more entrepreneurs are considering the investment in an existing business as a better option than establishing a new venture. An existing business will have an established goodwill, return on investment record and an existing customer base too. All these vectors might give a quick head start to the business.
There are many benefits of investing time and money in an existing business. Listed below are the top ten reasons why one should consider the investment in an existing business:
- Goodwill: The most important and valuable asset that an existing business gives to its new owner is ‘Goodwill’. It will give a benefit of an existing customer base and brand identity. In the case of a new setup, all this will have to be created from a scratch. But, this goodwill would need constant care and attention to avoid any loss to competition.
- Saves Time: For instance, you wish to start a business of retailing in household items. In case you start a fresh, it might take you months to create adequate inventory, identify suppliers, infrastructure, etc. On the other hand, when purchasing an existing business the base is already set. In the case of a service based business, years might be lost in trial and error to finalize target audience and market. Purchasing an existing business will shorten the ladder.
- Idea of required capital: Every business needs certain amount of working capital to meet the day-to-day expenses. When buying an existing, business you can easily gather an update on past cash flows and operating expenses. While starting a new venture, it is difficult to estimate these numbers as no prior concrete data is available. This also gives confidence to the investors as existing business will have a proven track record.
- Untapped business potential: This though, varies from case to case but might prove true for maximum existing business purchases. At times, the existing owners have had become complacent or may have other ventures to concentrate on, which leads to unexplored potential for growth of the business in question. As an enthusiast, you might identify this untapped growth potential and lead the business to a new high. This might call for few changes in business, sourcing or marketing strategies.
- Existing infrastructure: Existing business comes with the benefit of a set infrastructure in terms of suppliers, customers, employees, systems, and machinery. This enables the owner to focus on other items related to business.
- Ease in information gathering: With an existing business gathering information like operations, competition, future prospects, and industry on the whole. Information thus gathered for an existing business will be much more accurate as compared to a new setup.
- Flexibility in negotiation: Purchase of an existing business gives good chance to negotiate. Everything from price to financing options is open for negotiations, one just has to explore.
- Experienced workforce: An existing business will have an experienced workforce. These employees can share their experiences & contribute to long-term success of the business.
- Stock availability: When purchasing a retail business, it also gives the benefit of existing stock levels already maintained. Such stocks are kept to meet the needs in the near future. Buyers can negotiate to a good value and acquire these stocks also.
- Regulatory consents: Every new venture needs a regulatory consent with respect to products quality, distribution, packaging, etc. to operate. In the case of purchase of an existing business, such consents are already availed. These consents of permissions might be transferrable and might continue to be valid in case of ownership change too.
Entrepreneurs must follow a few steps before finalizing the type of business to purchase:
- Identify the interest: Anything one is not interested in will not last long. Thus, introspect and identify your interest to succeed in life.
- Talent: This is different from the interest. Talent is either self-acquired or experience based.
- Conditions apply: Everyone has some priorities and certain limitations. Be clear about both.
- Amount of investment: Decide on the amount and the sources to raise funds.
- Review business history: It is important to know how the business started, took off and what events are responsible for its current status
- Understand the functions: There might be various departments and functions responsible for running the business. It is important for the buyer to understand the functionality and interdependence between various functions and departments.
- Most important is to know ‘Why the business is being sold’?
- Check the balance sheets for last few years and understand the important ratios.
Not everyone possesses the skills to do all negotiations and close the deal of new business purchase. Just like real estate agents, there exist business brokers who are experts in the process of buying and selling businesses. Brokers can be hired on commission basis for smooth decision-making.
Do not take a decision in haste, do the due diligence and evaluate all possibilities before stamping the deal.