If you’ve been thinking about owning your own business, you’re not alone. The U.S. Chamber of Commerce reports 33.2 million small business owners in the United States, a number which steadily increases each year. Business brokers at Arthur Berry & Company have helped over 1,500 businesses find new owners over the last 40 years, many of which have been new entrepreneurs starting their journey into business ownership. The benefits of becoming an entrepreneur through acquisition go beyond building off of existing success.
What are some reasons/benefits to buy an existing business?
Acquiring an existing business after careful due diligence offers many reasons and benefits that make it an attractive option for entrepreneurs:
- Proven Track Record: Immediate access to a successful history, including an established customer base and brand reputation, minimizing uncertainties and risks that you can have with a new startup business.
- Experienced Workforce: Inheriting seasoned employees who are already familiar with the business operations reduces recruitment and training costs. On top of operational expertise, these teams usually already have built a strong culture.
- Access to Assets: Purchase typically includes valuable assets such as equipment, inventory, intellectual property, and established supplier relationships.
- Built-in Industry Relationships: Oftentimes sellers will pass on established relationships they have built over time. These industry and customer relationships can prove to be invaluable to a new owner.
What factors should you consider before buying an existing business?
Before finalizing the acquisition of an existing business, several crucial factors need careful consideration. The due diligence phase, which will be covered in more detail later in this article, can be daunting. A business brokerage can help alleviate some of the stresses that come with analyzing business opportunities, and can help streamline the process. Along with analyzing the operational success of the business, consider factors such as location, infrastructure, inventory management, and technology systems to ensure a smooth transition and ongoing operational efficiency post-acquisition. Evaluating these will help make informed decisions and mitigate risks.
What are the advantages and disadvantages of buying an existing business?
Buying an existing business presents both advantages and disadvantages for new entrepreneurs. On the positive side, acquiring an established business often provides immediate access to a proven track record of success, including an existing customer base, brand reputation, and operational systems, which can minimize the risks and uncertainties associated with starting from scratch. Additionally, inheriting experienced employees who are already familiar with the business operations can streamline the transition process and reduce recruitment and training costs. Acquiring a business also typically includes valuable assets such as equipment, inventory, intellectual property, and supplier relationships. In short, you are acquiring immediate scale where the capital and time has already been spent to achieve the scale. However, there are also downsides to consider. Buying an existing business may come with a higher upfront cost compared to starting a new venture, and there could be unexpected liabilities or financial burdens that may not be immediately apparent during the due diligence process. Inheriting existing processes and systems that may be antiquated or inefficent may limit opportunities for innovation and growth, but create opportunities for a buyer to create value and improve profitability (meat on the bone!). While buying an existing business offers numerous advantages, carefully scrutinizing the business from all angles is essential to make an informed decision.
How do you conduct due diligence when considering buying an existing business?
Conducting thorough due diligence is crucial to mitigate risks and ensure a successful purchase. First, gather and review all relevant financial documents, including tax returns, income statements, balance sheets, and cash flow statements, to assess the business’s financial health and performance. Next, analyze the business’s legal and regulatory compliance by examining licenses, permits, contracts, and any pending litigation or regulatory issues. While being sensitive to obligations after signing an NDA (non-disclosure agreement) , consider requesting the seller’s permission to conduct interviews with key stakeholders, including employees, customers, suppliers, and industry experts, to gain insights into the business’s reputation, operations, and potential challenges. Additionally, assess the market and competitive landscape to understand industry trends, growth opportunities, and potential threats. Finally, consider hiring professionals such as lawyers, accountants, and business valuation experts to assist with the due diligence process and ensure thoroughness and accuracy. Arthur Berry & Company offers business valuation services, which can be crucial to negotiating the appropriate purchase price in a deal. By conducting comprehensive due diligence, prospective buyers can make informed decisions and identify any potential red flags or areas of concern before finalizing the acquisition.
What are some common mistakes to avoid when buying an existing business?
Avoiding common pitfalls is crucial to ensuring a successful acquisition. A common mistake is neglecting thorough due diligence, including financial, legal, and operational assessments, which can lead to unforeseen liabilities or risks. Overestimating the business’s potential or underestimating the challenges of ownership can result in unrealistic expectations and disappointment post-acquisition. Another common error is failing to negotiate favorable terms and conditions, including purchase price, financing arrangements, and transition support, which can impact the profitability and sustainability of the venture. Including experienced professionals in the acquisition process can help you avoid making these mistakes. While close attention to due diligence materials is important, post-close details are also crucial to the success of the business. Disregarding the importance of cultural fit and alignment with personal values and goals may lead to dissatisfaction and difficulties in managing the business effectively. Finally, the advantages of acquiring a business vs starting a business are abundant, however independent verification of seller data and representations and obtaining guidance from professional advisors will help lead to a more informed purchase and smoother ownership transition.
