Paisa - September 2002
How to buy the right business
By Marcus Markou of www.BusinessesForSale.com
Most businesses take many years of hard work to establish. It is estimated that 90% of the 300,000 UK businesses that start up every year fail. The rationale of buying an existing business is that your chances of failure are reduced, as you will be buying a ready-made customer base, revenue streams and even staff. However, buying a business can also be fraught with difficulties. Buying the wrong business can be a costly mistake.
1. You have to decide what you want.
If you want to buy a business, you have to understand where your strengths and interests lie, how much capital can you access and what types of businesses really excite you.
How independent do you want to be? Maybe buying a franchise could be a good way into business ownership. Whilst you won't have as much creative freedom you will gain more security.
Are you mentally prepared for business ownership? Running your own business will take up a great deal of your time and energy.
What skills to you already possess that will be useful to you? Do you have any specific skills that could transfer into the business you will be running?
2. Looking for the ideal business.
Finding the right business for sale is not easy. You must be totally convinced that the business you will buy is the right business.
You can find business for sale adverts in local newspapers and trade magazines.
Business transfer agents or business brokers, (similar to estate agents for homes) represent business owners looking to sell their business. Some of these business transfer agents will specialise by sector (for example, pubs, care homes, hotels) and some will specialise by geography. They are listed in the Yellow Pages.
On BusinessesForSale.com we have over 10,000 businesses for sale – ranging by sector and geography. Most of these businesses are in fact represented by agents.
3. Evaluating the business.
You will need to ask some searching questions to make sure the business you end up buying is the business that was being offered for sale in the first place. Satisfying yourself and doing the investigative work to make sure you know exactly what you are buying is absolutely essential. You must work like a detective - whether you are looking to buy a pub, a clothes shop or takeaway. Leave no stone unturned in truly knowing every aspect of the business you are about to buy. When evaluating a business it is advisable to hire an independent business evaluator to make sure everything is checked thoroughly.
4. Financing the purchase.
When buying a business you are usually required to make a down payment - a deposit - which is typically 10% to 40% of the selling price. However, you must plan ahead and make sure that you have adequate working capital sources once you have purchased a business. If you do not have the funds needed for the down payment readily available, you must look for financing from an outside source such as loans from family or friends or a bank. The vast majority of businesses, particularly smaller businesses, are purchased with a significant portion of the purchase price financed by the owner.
Many first time buyers look to raise the money for a business purchase by selling their home and buying a business that also comes with accommodation. So, for example, businesses such as post offices, hotels and even antiques shops or dog kennels often come with living accommodation. This is a particularly attractive way into business ownership if you are in a position to realise increases in the value of your current property.
Name: Salman Mahmood
Age: 31
Status: Married with one child
Business Experience: Seven years
Qualifications: BSc Honours Computer Science
Having bought three businesses and sold one, at 31 Salman Mahmood is already an experienced, wise and bold entrepreneur. The businesses have all been in the IT sector - reflecting his computer science background, and the two businesses he is currently expanding (both of which were bought) are a computer software and graphic design company.
When it comes to weighing up the pros and cons of buying a business against starting up, Salman has no doubts on which are his preferred route. "You have more control," he states, "especially if you find a business with a high turnover, good contracts in place, customers and goodwill. You can be in business from day one. Setting up a business can be more risky." "Finding the right business to buy can be very time consuming," he states. "The key to being successful is finding the right business - quickly and effectively." However, he adds "If you wish to investigate a business you need to employ an accountant and a lawyer and that is where the process can become expensive."
So how does Salman go from looking at thousands of opportunities to making an offer on a business? "I use the internet a lot," he says. "If I see anything that catches my eye I request more information." The information that most brokers, agents or private sellers send is usually a brief summary of the business for sale.
"A quick way of creating a shortlist from these summaries is to try and speak to the seller directly on the phone - even for just five minutes. That way, you can quickly work out whether the summary of the business is accurate."
Once Salman has created a shortlist of opportunities he starts the investigation process. "One of the most important things I look for is existing contracts with clients - especially with a service business because that is where the value lies," he states. "I ask myself, what will be the implications to the business if the client goes?"
He also stresses that the right accountant or lawyer can be the difference between buying successfully or not. "If a solicitor takes too long in cementing the deal you run the risk of being outbid by a rival." His key advice is to get a lockout agreement once you have found a business. "It's vital to do so - maybe with a deposit or a legally binding timeframe which can prevent you from being outbid."
He is also very reluctant in buying a business based on the existing staff. "They could simply leave you," he says. "And then what? That is why it is important you have direct relevant experience of the business you are going to buy."
His most treasured piece of advice, and something he has clearly subscribed to, revolves around the mercurial word 'potential'. "Every business has potential," he declares. "Which business doesn't have potential?" I assume that Salman never buys a business with potential. But before he is misunderstood Salman quickly clarifies his position. "Well, that's not strictly true," he says. "The trick is to buy a business with potential but not pay for it. That's the trick."
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Top tips when buying a business:
1. Think about your own strengths and weaknesses, and focus on the business that is right for you and your needs. Eg. Do you need to live on the premises?
2. Research your sector using the trade press, the internet and even word of mouth. This will help you to ask the necessary questions if you decide to proceed.
3. Have a reputable solicitor, accountant, and possibly a commercial surveyor in place. They will oversee local searches, check legal implications and analyse the accounts.
4. Be prepared to pay for an independent professional business valuation.
5. Visit the prospective business in person. Be discreet the owner may not wish staff to know the business is for sale.
6. Examine the clients and customer base closely. Also look at the suppliers to that business.
7. Look for areas that the current seller has not exploited, giving you 'hidden' value. This can be from websites through to better marketing.
8. Shop around for the best deal to finance your purchase - your local bank may not be the most competitive.
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