What to Know Before You Buy a Business

Startup business always comes with an incomparable passion, especially if you have done lots of planning and research before kicking off. Be that as it may, things can turn against you if care is not taken.  Instead of starting a new business on their own, many entrepreneurs prefer to buy an already existing business or venture into a franchise operation, which will save them the stress and possible danger of starting a new business.

In this write-up, consideration will be given to what it entails to join a franchise or buy an already existing business.

 

Buying a business

An already existing business is already operational; buying it looks like the safe option out.  There is already a ready cash flow and established customers.  If the business already has good will among members of the public, you will also be buying into the benefits of that goodwill. Any asset already possessed by the company will also become yours, like fittings, fixtures, equipment and stock.  Things even get better if the company has an updated customer database that can be sensitized about your products and services in the future.

You will agree that the above description makes it sound so easy. Be that as it may, there are certain things you need to consider; it is very important to undergo the due diligence process, and you should be very familiar with the term ‘caveat emptor’, which means ‘let the buyer beware.’ By buying a business, you are also agreeing to take on the risk of the business failing in the future; you should also beware that you may not be able to meet your profit and sales expectations in the business. Be careful not to be impatient, making you rush the process without due diligence. If you are impatient, you may get your fingers burnt.

First and foremost, find out about what you are buying before you put your money on it.  Find out if the asking price is reasonable and fair; this way, you will not be met with any surprise after the deal is closed.  In the course of the due diligence process, properly inspect the various aspects of the business you want to buy, like the industry, reputation, finances, operations and so on. Make sure you have a full understanding of the staffing requirements, the ongoing cost and virtually everything about the business before you place your money on it.

If you fail to plan, then you are indirectly planning to fail. Many new business owners do not spend adequate time on due diligence process, but many individuals who go into franchise spend more time investigating the business.   Relying on just your gut alone is never enough; you need to also do your due diligence to make something truly tangible out of business.

Some of the important aspects of due diligence to be addressed are:

  • Suppliers: Will they change their prices?
  • Staff: Will those you want to retain also want to stay on?
  • Equipment: Is it free from debt and in good working condition?
  • Business premises: Is the lease on the premises transferable.
  • Sales/revenue: Will the revenue continue?

 

Buying a franchise

Buying a franchise is synonymous to buying a business in a box. The business is complete, but it is presented as a brand, marketing material, process and systems belonging to someone. Despite the fact that it looks easy top run, the franchisee and the franchisor need to agree on several factors before the business can kick off.

Research has shown that franchise tends to record more progress than a purchased business.  According to a study carried out in 2008:

  • Profit less than $50,000 per annum was generated by up to 58% of franchises
  • Loss less than $50,000 was generated by about 3% of franchisees
  • Total percentage of successful franchises is 81%.

It is clear that success is not entirely guaranteed by either a franchise or buying a business. Be that as it may, the measure of risk you have to undertake is less when it concerns a franchise.  There had been a mixture of success stories and relatively bad reviews about a franchise. The factor that determines success in a franchise is the due diligence you do before you buy into the business.