Start-up vs buying an existing business
Provided by Business Partners Ltd, South Africa's leading investor in SMEs
Buying a business is an alternative way to get into business with less risk than normally associated with a start-up venture. But there are still many factors you have to consider before signing on the dotted line.
Buying a business can be an easy way in, but there are many factors that will influence a final decision. Getting professional advice is essential, as this will help you cover the unknown aspects of the business. Should the take-over be successful, the investment could result in monetary and personal reward. Failure, on the other hand, could mean disaster, so take great care to prevent the trauma of failure.
Many buyers driven by emotion rush into a deal without adequate research into the proposed venture. To minimise the risks, take all the necessary precautions and don't rely on your personal judgment alone.
Before you become an entrepreneur
There are six different stages to consider before you enter the SME arena, namely finding a suitable business, the basic characteristics of an entrepreneur, information required, determining the price, negotiating a deal and financing a transaction.
The following steps should minimise the risk when buying a business:
- A self evaluation should be undertaken to ensure that running a business is compatible with your own goals, ideals, personality and abilities
- Decide on what type of business would realise your goals and suit your needs and experience
- All relevant information should be collected on the business and related macro-aspects such as the market size, trends, technological advancement, etc
- Evaluate the business and the future prospects
- Determine the price
- Raise the necessary finance
- Comply with the legal formalities
- Implement the take-over
At an early stage of the evaluation process one should determine the real reason for the business being on the market. Some legitimate reasons for sale are retirement, ill health, relocation or involvement in other projects.
Of course the reverse is also applicable. There might be hidden reasons for selling like decline in business, change in buying patterns resulting in obsolete products, cash flow problems, poor conditions or judgment problems with suppliers or poor management.
Advantages of buying an existing business
There are specific advantages in acquiring a business rather than starting you own especially for the less experienced or newcomers. They are:
- A successful business should offer a lower risk than a start-up business
- At least the seller has some history and a track record to base projections on. In addition, the location may be good and alternative locations may be unavailable, expensive or risky
- A new business requires times to establish, often resulting in an initial trading loss. The possibility exists that an established, successful business can generate profit immediately or within a relatively short time
- An existing business often has established suppliers, whereas setting up a new business involves a trial and error process in selecting prospective suppliers
- A buyer often inherits a trained staff compliment and an existing client base
Disadvantages of a take-over
- There is often a direct correlation between the success of the business and the owner. In other words, a business is often reliant on the flair and personality of the owner
- The new owner may inherit a workforce with entrenched attitudes towards their responsibilities. It could take time and money for them to adopt new policies
- Old equipment may result in production delays. Repairs to or the replacement of assets could put a severe strain on the cash flow
- Due to a lack of experience, the buyer may end up with dead stock, investing fresh money into old inventory
- A buyer may pay too much for the business. Often goodwill is valued unrealistically high which results in lower profits and returns on investments
The difference between failure and success lies in a careful analysis of all the relevant factors. If you don't have enough experience in this area, seek professional advice to help you make the right decision.
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