Resources for Buyers

May 24, 2011 / aldes

How to Buy a Business

The risk involved in running one’s own business should always be compared with the stability of working for and earning a fixed salary. There is certainly no fail-safe method of buying a business without appreciating the fact that you will need to take the risk associated with this better income.

It is for this reason that many buyers will find themselves “in limbo” and not be able to make the decision on actually buying their own business. To buy an existing business is however a much safer bet than starting up your own new business. An existing business that has been going for three to five years have surely ironed out all the possible hiccups and has also got a success recipe – reason for it being in business.

In comparison with establishing a new business or franchise the cost of buying an existing business is also cheaper. The following are some advantages of buying a business as opposed to starting up your own concern:

  1. Immediate Profits – You don’t have to wait to establish profits. Your income is from day one. This is far better with a newly established business where break-even point may be after twelve to eighteen months.
  2. Less Risk – The success of the business has already been proven by its track record. Internationally nine out of ten businesses fail within the first two years of trading.
  3. Base to Build on – A new owners drive and enthusiasm can be used to increase the current profits.
  4. Problems Sorted Out – You are free from the start-up problems with existing customers, suppliers, employees, premises, as well as required assets.
  5. Cheaper Finance – Very often a seller is prepared to provide financing at a lower cost and with less security than would be required by a financial institution.
  6. Feel of Business – Seller may allow a purchaser into the business which will give the purchaser an opportunity to see if the business will really be suitable.

However when buying your own business, do ask yourself the following questions:

  1. What type of business do you require? Make sure it matches your expertise and skills.
  2. In which area should the business be located? To try and manage a business without being in it, normally ends up in tears.
  3. What income do you need? Don’t waste your valuable time looking at businesses with too small or too big an income.
  4. What is the price? The best indication of an affordable business will be that you have 50 – 60% cash available to buy the business at its asking price. You might end up only frustrating yourself looking at businesses that you cannot afford.
  5. If you need to obtain financing you should also take the following in consideration. The banks will always require security for any business loan. It is not the function of the bank to take the risk in buying the business and it would therefore require that you as the borrower will be able to cover the loan on a rand for rand basis.
  6. Ask your broker on the availability of documents to prove the income from the business. You will, after deciding to buy the business, end up having to do a due diligence on the profitability of the business. It is however a fact that in South Africa most owners of medium and small businesses do not attend to this administrative function of their business very well and a potential buyer (with his broker) normally struggles to get all information required.

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