Becoming Self Employed by buying a business

It is great that you have decided to become an entrepreneur. In this case the best way to start is to buy a business because this will indeed save you a lot of time in energy that would have otherwise gone into building the same business from scratch. Leading economists show the trend of entrepreneurship on an upswing in the next decade and hence, your decision to enter the fray of enterprise owners is a good one by any standards.

There are many advantages for buying a business rather than starting one and this article will highlight for you some of the best reasons available.

  • 1.Ten main advantages that you get when you buy a business:
    • a.Reduced failure related risks
    • b.You get an earning (profitable) business right from day one
    • c.It already has ironed its glitches and established a profitable working pattern
    • d.It always has an established customer base, established product and linkages (backward and forward)
    • e.It already has tried-and-tested supplier base
    • f.It has a good trained workforce who already know their jobs and have an established work-pattern
    • g.It already has sufficient credibility in the market which will have a higher possibility for succeeding further
    • h.The buyers may get quite a bit of assistance from the seller both in securing finance and establishing the business further
    • i.It is easier to secure finance since the business is seen by the prospective financial institutions as an asset

    Besides, you also get the following plus points:

  • 2.Easy to finance expansion: Banks and financial institution will be more comfortable to lend you the finance required when they see something as a base which is already functional, rather than a new business which cannot be measured in tangible results. This will also expose you and your (if any) financial partners financial risks because your new company will already have a record of revenue and customer base.
  • 3.Better finance options: Most financiers valuate the loan at 50-75 percent of the value of the business. Hence, an established and earning business will definitely get you a better loan deal than a new business which is yet to prove itself in terms of earning.
  • 4.Better financial safety: Only about 10 percent of the new businesses are really secure right at the start. This is because all new business are high risks till they prove that they are successful. Since none of the commercial aspects of he business are proven in the market with a new business, the safety level is much lower in a new business than an acquired business.
  • 5.Reduce the future risk: Statistics show that more than 60 percent of the businesses that start fail within the first three years. Hence, buying an established business will definitely carry you beyond this basic risk by handing you a business who has 'passed the test' of the survival in the market.

In other words when a business is bought, though it is new to you - it is a old to the market and hence it possesses a greater chance for succeeding because it is already established with a steady customer base, a workable management team, has proven systems in place and most likely always is showing profit. In case the profit is marginal or even if it show negative returns (as in a turn around) it is more possible to get a profit from an already running business than one which is just starting. You will have a base from where to start which will make much easier to steer the business to success that starting from ground zero and handling all the internal and external processes right from ground zero.

There are a few downside aspects to this as well. The greatest test while buying a business is to work out the ideal cost, including the cost of consultants, accountants, lawyers and valuation experts. The cost will definitely be higher than the business that is starting from scratch - but that is because it has already established itself in the market, has a customer base, a profit history and all the financial fundamentals have already been worked out. Out of this, the expenses spent on researching the business will not be recoverable as well as the cost of the experts' payments. Besides, some businesses loose a small percentage (about 10 percent) of their customer base after being take over.

This is why it is very important that you do your research of the business thoroughly and totally so in the long run, after the business is taken over, surprises do not pop up to upset your rhythm. There is wisdom is negotiating with the old management, suppliers and even customers while the old ownership is still there so they are comfortable and respond based on their past relationship with the old business rather than the new non-existent relationship with you as the take-over owner. In this way you will get the best deals with the least convincing and negotiations.

Another good advice is to put together your team as early as possible. The resource team should include experts that know what they are doing whether it is for the business internally as the management team or externally as the lawyers, financial experts, business experts, etc.

Be careful that the research is done thoroughly or you will end up with the short end of the stick and nothing is more painful than to realize that you have purchased a non-viable business after the take over.

A word of caution in the end: there is no guarantee that inspite of your best efforts you will not be faced with unusual risks and daunting tasks. There are risks in the market that may not be visible at the time of buying the business, there may be labor problems which can set you back and so on. However, if the groundwork is done well the chances are more that you will be able to start collecting your profits from the very first month after the take over is effected.