Leadership & Productivity
How to buy an existing business
12 min read
28 November 2018
Buying a business doesn't make you any less of an entrepreneur than starting your own. We tell you what the advantages are, and how to close the deal.
British people love starting their own businesses. But don’t take my word for it. You only have to look at the statistics to see that it’s true.
Last year, The Financial Times reported that the rise in the number of self-starting entrepreneurs had broken records.
This has been part of a pattern of steady growth, which saw over half a million startups founded in 2015, and that number rose to 660,000 in 2016.
Those feelings of optimism were backed up by later statistics in 2018 that applauded the economic domination of small and medium enterprises in the UK.
The findings said that some 5.6 million small businesses existed in the UK, and accounted for 99.3% of all private sector businesses that employed around 16.3 million people.
Startups are growing in number, but they are risky
However, it’s not all good news for entrepreneurs and their startups. According to recent statistics, around 8 in 10 companies flounder during their first year of operation in the UK.
This comes after a report covered by the Financial Times said that out of all UK startups founded in 2013, only half survived their first three years of life, these statistics were even worse in London, and sources point to lack of financial planning as a common cause of their failure, so what can be done?
One option is to become the owner of an already existing business that’s fully operational, staffed and producing profits.
These sorts of businesses hold potential too, enabling entrepreneurs, if they are talented enough, to be able to scale them to the next level. Here’s what the advantages of buying an existing business are, and how you can close the deal.
Buying a business 101
Because you’re not starting your OWN business, but are buying an existing one, you have to make sure that you know all the details about the business from the inside and out.
You don’t want to buy a business with skeletons in its closet. Neither do you want to find out that you’ve overlooked crucial elements of the business once you’ve purchased it.
The advantages of buying an existing business
Just because you’re not starting a company from scratch, it doesn’t mean that you’re not an entrepreneur that’s looking for impact, innovation and creativity.
All of these can be found when buying an existing business, but make sure it’s the right one for you, here are the advantages of buying an existing business:
It’s easier to gain finance
Starting your own business means that it takes more work to convince lenders, including banks, to fund you. As businesses are most likely to flounder during their first years of existence, funding an already existing business that’s been around a little longer makes for a less risky endeavour for finance providers.
Lenders can draw on your past trading figures rather than having to believe that an inspirational business plan with no grounding will be successful.
A business that has traded profitably for a number of years is able to answer many of the searching questions a lender might put to a loan applicant.
When an existing business is already making money when a new owner takes over, it means that the business is already eligible for securing loans right from the start.
There’s income from day one and less investment is needed
Whilst the owner can be making money from the first day of their ownership, there are also less ‘set-up’ costs than there would be if one was setting up a business from scratch. This includes less expenditure on things like buying office equipment and sourcing staff.
For entrepreneurs looking for reliable and recurring revenue, buying an established business is a better solution that ‘starting a startup’, as the latter can take years to generate a steady income.
The brand is already known to consumers
Without having to put in the mammoth task of devising and building a brand and customer following from scratch, new owners can use this time to develop a greater and more sophisticated customer awareness of the brand with their existing team.
Saving this time also means you can dedicate more brainpower to developing strategies and cutting unnecessary costs in order to accelerate the business further.
You can get to know the business before you make changes
The main reason why entrepreneurs buy an existing business instead of starting their own is because they can see its potential to go further, and they want to use their existing entrepreneurial skills to make it happen.
Before you make sweeping changes to the business, see what it already has going for it. Take time to monitor the performance of existing staff and asses the effectiveness of their current strategies.
Then you can analyse the net performance of the company and make positive changes accordingly.
It’s less stressful than starting a startup
You will have a more manageable workload when you take up your position as the new owner of an existing business.
This is because you will already have an experienced team in place to manage the transition from the old administration to the new.
Although starting your own business is a great, and often rewarding challenge, responsibility and expectation remain high whilst free time is low on the agenda.
For entrepreneurs wanting to make a difference, yet not wanting to sacrifice all their time nor face heavy loan repayments, buying an existing business offers them the challenges and thirst for innovation they crave, without the extra pressures of starting their own.
How to secure the deal
Buying a business is like buying any other item. Although the stakes are higher for you if you make the wrong decision, the crux of what you need to do to get it is the same for everyone.
Whether you’re buying an item from a market stall or a million pound business, let’s start with the checklist you need to tick off first:
Have a price in your head
Think of it as a property deal. Similarly to when you’re making an offer on a house, you wouldn’t blindly accept the figure the vendor wants regardless, would you?
It’s the same when buying a business. Don’t enter the bargaining process without a solid figure in your head. Never accept whatever price the seller initially offers without consideration.
Start low but back it up with justifications
Make sure you start negotiations with the lowest possible offer. But you have to justify the reasons as to why you’re offering this amount.
This is when research comes in, you need to pick holes in the business, and pull up statistics, whether that’s evidence of poor performance or anything else. You need to show that work needs to be down to develop the business to its full potential.
But that work requires money, hence why you need to buy it at a reduced figure. Without providing these analytical facts, you risk offending the seller and ruining the chances of a deal.
Remain tough and don’t reveal anything
If you start the process in a friendly and overly jovial way, you leave room for the other side to take a tough and more dominant stance in the negotiations.
You cannot afford to be on the backfoot, so start tough and the other side is more likely to feel threatened and will respond in a deferential manner.
Part of this is not revealing what you are able to spend on the deal. Keep things vague, and as open as possible.
Use phrases such as “I may be willing to pay X amount, SHOULD these objectives be met.”
The important thing is to not give the other party any information they can use as ammunition against you in order to make you pay more for the business.
If the other party asks you how much you can afford to pay for the business, ignore them. You need to save this information until the later stages of negotiation.
If they have no other buyers, then drop this information on them as your final offer, “this is the amount I have to pay for your business right now, take it or leave it.”
If you do tell them during the early stages of negotiations, and the amount is lower than they thought, they could try and rope you into loan based agreements to get you over the line. You don’t want to be financially beholden to ex-owners of the business that you’ve now bought.
Don’t respond to flattery and remain indifferent
This is an easy mistake to make. If the other party grants a concession to you as part of the deal, don’t be tempted to respond warmly.
Although it’s a natural human response to do so, stay tough. See this stance through to the end, and to hopefully, a successful negotiation.
Remain unemotional. Make it clear that if the deal doesn’t go ahead, it’s not ‘a big deal’ to you.
This will make the other party think that you are a busy and successful entrepreneur, who may have many other options in terms of buying a business.
This should make them more likely to bend the knee to your demands, as they don’t want to miss out on selling their business.