Buying a Business - Pro's and Con's

When most people talk about starting a business, they mean setting up a company from scratch.

In some respects, that’s one of the hardest ways to get going in business, as you have to do everything for the first time and make some pretty hard decisions along the way.

One popular alternative is to buy a franchise, where the operations and marketing systems have already been worked out, tested and proven to work. The downside of a franchise is that you won’t have as much control as in a business you started yourself.

There is a happy medium if you have access to finance. And that’s to acquire an existing business. You will get an operation that’s proven to work and has the necessary systems and staff in place. But at the same time you will have full freedom to make whatever changes you want to as the new owner.

Here are Bytestart’s pros and cons of buying a business.

The upsides of buying a business

• The business idea and model will be proven, and the market for it will be well established.
• There will be an existing customer base. This will be important to leverage if you wish to grow the business.
• The business will have years of evidence available to you to understand how the market reacts to competitors, new products, etc. This means you are less likely to make mistakes or stumble across problems people starting new businesses will face.
• It will have a reputation (hopefully a good one) and a trading history in its sector. This can help offset any lack of knowledge in the industry when you buy it.
• There’s no need to sit down and try to work out a business and marketing plan, or guess at forecasts for the year to come. You can use historical data to help look forward more accurately. This means your cash flow is more predictable.
• When you buy a business you typically buy the team too. Those employees will have years of valuable experience and knowledge you can leverage.

1. Someone selling a business will have invested a great deal of their own money, and even more of their own time. And that means they will want to generate a significant amount of money in return for ‘losing’ the annual profits from the business. Depending on the kind of business, buyers typically pay a multiple of the turnover. If the business turns over £100,000, you may pay as little as £30,000, or as much as £200,000. In many cases, there is no magic formula to establish the value of a business, although standard valuation methods do exist.

• On top of that you’ll need to pay for professional advisors such as an accountant and solicitor. Fees can become quite large – bespoke advice isn’t cheap. You need to be sure that you've covered all bases before committing to a purchase, so such fees are an unavoidable expense.
• If the seller has focused more on the sale than the business, there’s a chance it may be a little run down. They will certainly have taken advice on how to get the most financial value out of it before and during the sale. It means you may have to invest more than the purchase price to get the most out of it
• You will be bound to all existing contracts, including with employees, suppliers and customer. All existing contracts will need to be checked carefully during the due diligence process.
• Taking on staff someone else hired can be an interesting challenge, especially if the seller was very popular within the business. Watch out for staff leaving to join them in a new business venture, taking the expertise you paid for elsewhere.