For some entrepreneurs considering business ownership, acquiring an existing business is preferable to starting from the ground up or opting for a franchise.

However, purchasing a business requires careful due diligence, a process as critical as creating a business plan for a new venture. This in-depth investigation is necessary to reveal both the strengths and weaknesses of the business; neglecting this step can lead to unforeseen problems and potential failure.

Advantages of Buying an Existing Business:

• Established Track Record: A business with a history of success provides a stronger likelihood of continued success. It typically comes with an existing customer base, established supplier networks, and operational procedures.

• Optimal Location: Purchasing a business often means securing a prime location, avoiding the risks associated with less desirable locations that may not attract sufficient customer traffic.

• Skilled Workforce in Place: Existing businesses usually have experienced employees who can facilitate the transition and contribute to ongoing revenue generation.

• Operational Infrastructure: The necessary equipment is already in place, and its condition and capacity can be evaluated before purchase, reducing initial investment costs.

• Established Inventory and Credit: Successful businesses have already optimized their inventory levels and have established credit terms with suppliers, which benefits new ownership.

• Immediate Operational Readiness: Buying an existing business allows for immediate income generation, avoiding the delays of setting up a new operation.

• Leveraging Past Owner Insights: Even if the previous owner is not involved, their records and past decisions can offer valuable insights for the new owner.

• Easier Access to Finance: Securing financing is often simpler for an existing business, particularly one with established lender relationships.

• Potential Bargains: Businesses are sometimes sold at reduced prices for various reasons, presenting opportunities for astute buyers.

Disadvantages of Buying an Existing Business:

• Risk of Inheriting a Failing Business: Some businesses are offered for sale because they are struggling financially.

• Mismatched Personnel: Existing staff may not align with the new owner’s vision, requiring potentially difficult personnel changes.

• Deteriorated Location Attractiveness: Shifts in local demographics or increased competition might make a previously ideal location less favorable.

• Outdated Assets: Unexpected costs can arise if existing equipment or facilities are found to be obsolete or inefficient after purchase.

• Resistance to Change: Implementing new strategies or innovations can be challenging due to ingrained practices and customer expectations.

• Physical limitations:

  1. Design Issues: The business’s layout, branding, or online presence might be outdated and need costly renovations or updates.

  2. Inconvenient Location: The business could be situated in a location that is not easily accessible to customers.

  3. Merchandise Problems: The business might have outdated or undesirable inventory, or offer low-quality products, leading to customer dissatisfaction.

• Intangible limitations:

  1. Negative Public Perception: The business may have a poor reputation with customers or employees, making it hard to attract new business or retain staff. Key personnel may also leave.

  2. Pricing Issues: The asking price of the business might be too high, making it difficult to recover the investment.

• Potential Hidden Costs: There could be unforeseen costs linked to the business, like environmental liabilities or outstanding debts.

• Inherited Legal Issues: The business may be subject to existing lawsuits that the buyer will inherit.

Steps in Acquiring a Business

• A significant portion of business acquisitions fail to meet buyer expectations. To improve the chances of a successful match, follow these steps:

• Assess your skills and capabilities.

• Define your acquisition criteria.

• Identify potential business candidates.

• Investigate and evaluate candidate businesses to select the best option.

• Explore financing options, remembering the seller can be a funding source.

• Negotiate a fair agreement with the owner.

• Ensure a smooth transition by communicating with employees, listening to their concerns, and asking questions.

STEPS IN ACQUIRING/BUYING AN EXISTING BUSINESS

Buying an existing business can be risky if proper steps are not followed.

1. Self-Assessment: Identifying the Right Business

   Begin by looking inward. Evaluate your skills, interests, and goals to determine the type of business that aligns with your personal strengths and aspirations. Consider questions such as:

   • What types of business activities are appealing or unappealing to you?

   • Which industries show promise for growth and are of interest to you?

   • What are your personal objectives for owning a business?

   • Evaluate your readiness in terms of time commitment, energy, financial resources, and risk tolerance.

   This self-analysis helps identify businesses that not only meet your requirements but also offer personal satisfaction and success.

2. Prepare a list of potential candidates.

   Once you have defined your business acquisition goals, start your search. Do not only look at businesses publicly advertised for sale. The “hidden market” of businesses that might be for sale but are not openly listed is a valuable source of high-quality businesses. Many purchasable businesses are not publicly advertised and are available through owners, business brokers, or other intermediaries. These less visible opportunities often represent attractive acquisition targets.

3. Investigate and Evaluate Candidate Businesses and Evaluate the Best One

   Patience is crucial at this stage. Thoroughly examine each potential business, assessing its financial health, market position, competitive environment, and operational strengths and weaknesses. This process will help you shortlist the most promising businesses and will simplify the business valuation process later.

4. Explore Financing Options

   A key challenge in finalizing a business acquisition is securing financing. While financing an existing business is generally easier than for a new business, some traditional lenders may be hesitant about acquisition deals.

Those willing to finance business purchases typically lend only a percentage of the asset value, so buyers often need to find other funding sources. Fortunately, seller financing is a common option, often more flexible, quicker, and easier to obtain than traditional bank loans.

1. Ensure a Smooth Transition

   Once an agreement is reached, managing a smooth transition is critical. Despite careful planning, unexpected issues can arise. For example, a new owner’s planned changes might cause stress and worry among employees and the former owner.

   To facilitate a smoother transition, a business buyer should:

   • Prioritize communication with employees. Business sales create uncertainty and anxiety, and employees need reassurance.

   • Be transparent with employees. Share your vision for the business honestly, aiming to build motivation and support.

   • Actively listen to employees. They possess direct knowledge of the business’s strengths and weaknesses and can offer valuable improvement suggestions.

   • Consider retaining the seller as a consultant during the transition. The previous owner can be a valuable resource, particularly for less experienced buyers.

EVALUATING AN EXISTING BUSINESS

• WHY IS BUSINESS FOR SALE

• CONDITION OF THE BUSINESS

• POTENTIAL FOR COMPANY’S PRODUCTS OR SERVICES

• LEGAL ASPECTS

• FINANCIAL SOUNDNESS

Evaluating an Existing Business

Buying an existing business can be a significant opportunity, providing an established brand, customer base, and immediate revenue. However, finding the right business to buy is not simple; it can be time-consuming, costly, and sometimes challenging.

Business evaluation is a process of assessing and analyzing different aspects of a business to determine its worth, potential risks, and long-term viability. This involves a detailed examination of factors such as financial performance, market standing, operational efficiency, assets, liabilities, reputation, and legal compliance.

The main goal of business evaluation is to gain a clear understanding of its strengths, weaknesses, opportunities, and potential threats before deciding to purchase or invest.

ways of evaluating an existing business before purchase include;

1. Personal Assessment and Criteria: Initially, determine if the business aligns with your personal interests, resources, and skills. Evaluate if it is a good fit for you regarding finances, credibility, skills, and professional network.

2. Perform due diligence: This involves thorough research and verification of the business details to confirm you are buying what you expect and to accurately assess its value. Assemble a team of experts, including a banker, industry-specific accountant, lawyer, and potentially a business consultant, to conduct due diligence. Focus on these key areas during this process:

   • Seller’s Motivation: Understand the real reason the owner is selling.

   • Physical State: Assess the condition of physical assets like equipment and stock.

   • Market Prospects: Investigate market demand, customer base, and competition to estimate growth potential and risks.

   • Legal Review: Thoroughly examine legal aspects like collateral, contract transfers, and ongoing obligations.

   • Financial Analysis: Analyze financial records with an accountant to assess profitability, stability, and future financial projections.

3. Request the Business Plan: Does the seller have a business plan? This document can reveal much about the business’s history, future direction, and the seller’s commitment to the sale.

4. Evaluate the Seller: Your relationship with the seller is important as you will rely on them for information. Pay attention to your interactions early on—signs of difficulty now might indicate future problems.

5. Understand Operations: Gain insight into how the business functions by assessing its working capital, production processes, supply chain management, and capital expenditures. Ensure the business operates efficiently and smoothly.

6. Value Assets: Identify all assets included in the transaction and their value. This includes intellectual property, brand names, trademarks, patents, and other key assets. Evaluate how well these assets are protected and their importance to the business.

7. Assess Reputation: Research the company’s reputation by checking online reviews, media coverage, and any past events that might have impacted its image. A strong reputation enhances the business’s value.

8. Verify Licenses and Permits: Confirm that the business has all required licenses and permits for legal operation. Check if these are current to prevent potential disruptions or penalties after acquisition.

9. Confirm Entity Status: If the business is a partnership, corporation, LLC, or joint stock company, review relevant documents to ensure it is properly registered and in good standing. Verify the seller has the legal authority to sell the business.

Protecting Your Idea

1. Intellectual Property: Business concepts, inventions, logos, and unique product names can be considered intellectual property if documented in written, audio, or video formats.

2. Legal Forms of Protection:

   • Patents: Exclusive rights granted to inventors for a limited period for new and useful inventions.

   • Trademarks: Brands or symbols used in commerce that are legally protected and regulated by governments.

   • Copyright: Exclusive legal rights controlling the use of original creative works, including text, video, audio, and multimedia formats.

3. Maintain Confidentiality: Exercise caution when sharing your idea with others, especially those you do not have a strong trust relationship with.

4. Document Your Idea: Record your idea in writing, including a comprehensive description and any relevant sketches.

5. Registering Patents and Trademarks:

   • Patents: Submit a patent application to the appropriate government agency to secure patent rights.

   • Trademarks: Register your trademark in the relevant country or region to gain legal protection.

6. Apply Copyright Notice: Copyright protection is automatically granted in many countries without registration. However, it is advisable to add the copyright symbol (©) to your work.

7. Notarization: Consider having your written description of your idea officially notarized for added legal security. Notarization is the official verification of a signature on a document and confirmation of the signer’s identity.