The COVID-19 crisis has been extremely difficult for businesses around the world. Many of them have struggled, and some are still ‘on the ropes’ even as we speak. But, from crisis comes opportunity – in this post, we will explore whether this is the ideal time to buy an existing business and also provide some tips on how to buy a business.
Be Your Own Boss
Many of us dream of running our very own business. The freedom to be our own boss and set our own working hours is life-changing and of course, running a business means that the potential for earnings is infinite. However, starting a business from scratch is not easy. It’s hard work, it’s stressful, and when you remember that 60% of new businesses fail within the first 3 years, many would-be entrepreneurs can be put off from even trying in the first place.
However, buying an existing business can be a great way to become the boss without taking on all the risk. When acquiring an existing business, the buyer is taking on an existing brand with an existing customer base. Whilst it does usually take a larger capital investment to buy an existing business than to start one, the risks can be much, much lower.
How To Find a Business To Buy?
According to a recent survey, only 2% of American businesses are currently listed as being for sale. However, nearly 66% of business owners stated that they would consider selling their business if the opportunity arose. What this tells us is that whilst a small number of businesses may have sale signs hanging on them, the market is potentially much larger.
However, inexperienced business buyers would be advised to stick to looking at businesses that are for sale rather than cold pitching. There are websites listing a business for sale as well as specialist brokers who can help get you started.
What To Look For When Buying an Existing Business?
Buying a business is complex. The whole point of buying an existing one is to acquire a successful venture with good profitability, and yet, on the other hand, if a business is doing too well, then this will be reflected in the sale price, which may be unrealistically high.
In order to help to assess the prospects of a business that is a sale, then it helps to try and ascertain the following;
1. Why Is The Business For Sale?
There are lots of reasons that people sell a business. Perhaps they want to retire, or maybe they fancy a new challenge and want to start a new venture with the sale proceeds. After weathering a difficult 2 years of COVID, many business owners have simply had enough of the stress, and some are looking to cash out and take early retirement or simply go back to working for the man!
On the other hand, some businesses are for sale because they are in trouble. Perhaps income is dwindling, or maybe the service they provide is about to become obsolete. You should always ask a business seller what their motives for selling are but don’t always expect to get the full truth.
2. How Did They Calculate The Asking Price?
Valuing a business is notoriously difficult, and it can sometimes feel that the asking price has simply been plucked out of the air. Some owners base their asking price by multiplying the annual profitability by x, whereas some simply look at the assets. It largely depends on what sector the business is in.
Feel free to run your own calculations and see how the 2 compare.
3. Will The Seller Agree to a Non-Competition Agreement?
The last thing you want is for the seller to open a brand new business in the same niche and take all of their clients and customers with them! You can get indemnity against this (to a degree) by asking them to sign a legally binding and enforceable NCA (non-competition agreement).
4. What Are The Biggest Challenges Facing The Business and the Sector?
Every business faces challenges. Some are unique to the company itself and others general to the market they are in. If you are looking to buy a business, you should have some idea of what these challenges are, but it always pays to get as much information and insight as you can.
Financing a Business Acquisition
The biggest challenge in buying a business is usually going to be raising the finance to acquire it. Successful businesses don’t usually come cheap, and it is unlikely that your savings are going to cover it.
One option is to remortgage any property or asset that you hold, as this can be a fast way to borrow money at low-interest rates. Of course, relatively few of us these days have much equity in our properties, so this may simply be a non-starter. Also, bear in mind that if the business fails, you will risk losing your home if you have used it to finance the business.
Another common option is to borrow money from a bank. Most banks have specialist business purchase finance departments and can help arrange substantial sums of money. Of course, banks don’t lend easily. They may set high-interest rates and will ask a LOT of questions about the business, your experience, and how you intend to run it. In order to prepare for a business loan interview, check out this helpful business purchase loan guide so you will have a heads up on what kind of questions to expect.
Also, remember that a lending bank may also insist on having some form of control over the business, which may in some ways undermine your dream of working for yourself.
As well as established banks, there are also dedicated business financing companies out there as well as investment groups. Again though, whilst these can be a great way to get hold of the capital, working with them may entail surrendering some control.
Finally, you can also explore options like crowdfunding, peer2peer borrowing, or you can look to partner up with angel investors who may be looking at buying a business as an investment.
How To Choose a Business That You Could Be Successful In?
Perhaps the single most important factor when buying a business is to identify a business or at least a niche that you could be successful in. Even the most established business can fail if the wrong person is at the helm, and inversely, even struggling businesses in tough markets can turn a profit if they have the right direction.
You firstly need to work out what your experience, skills, and passions are and take it from there. For example, if you spent 10 years working as a chef, then you could quite logically make the step towards owning a restaurant or catering business. There are a whole new set of skills to learn along the way, but at least you have the basics.
If you don’t have a ready to go skills set, then instead try to find a business in an area you are at least interested in, as raw enthusiasm really can take aspiring entrepreneurs quite far – for example, when Richard Brandson formed Virgin Records, he knew nothing about the music business but simply loved rock music.
Finally, you also need to be honest about your soft skills. For example, if you are not a ‘people person, then working day in day out with disgruntled customers may not suit you, and you may instead prefer to look into business to business type opportunities instead.
Buying a Business in 2022
Running a business is tough, but it is rewarding and is something very few people ever regret. We hope you found this run-down helpful and that you now feel a bit more confident in taking those first tentative steps towards buying an existing business.