Buying a Business or Starting from Scratch

Congratulations on making the decision to become your own boss!

Starting a new business or taking over an existing one requires time and effort, so make sure you are motivated enough to make the commitment before spending money on it or ditching any current job! Be prepared to work long, unsociable hours, and for the high levels of responsibility, and sometimes stress that comes with it.

If you like the idea of having a business but don't want to start from scratch, you could buy an existing business or a franchise. Unfortunately many new businesses do fail, so take time to do research and read this guide to avoid potential pitfalls.

 

What do you want to do?

As obvious as it sounds, firstly you need to think about what it is you actually WANT to do. Many successful people do so well because they are enjoying what they do – and therefore it is easier to give a new business all the time and effort it requires. Make sure you are clear on this to avoid two possible mistakes:

• Will you be able to do what you actually want to spend time doing? Someone with a passion for cooking may dream of opening a restaurant, but then be disappointed to find they have to hire a chef to do the cooking because they are so busy managing the restaurant, dealing with suppliers etc. Think realistically about the roles that need to be carried out in order for the business to function, which ones you need to do and which can be delegated. Make sure you are happy to take on the roles left to you.

• Don’t buy a business for the security of existing customers if you are not going to carry on giving them what they want. It is simply a waste of money spending money buying a successful business that works if you are going to change everything. It’s ok to buy a failing business if you can see where it is going wrong and know how to fix it, but obviously not at the same premium. If you have your own ideas that can’t be applied to improve an existing business – start from scratch.

 

Does the industry have a future?

You must know about the sector you are going to work in and what the future is likely to hold before investing money into it. Ask yourself if demand for the product or service is going to grow or fizzle out in future. Will the launch of something better kill the market? Is your business idea flexible enough to reinvent itself when times change? Hint – if buying a business, find out why the current owner is selling – is it because the business will not continue to be as profitable?

 

Will customers want to use your business?

Whether starting your own company or buying one, familiarise yourself with competitors and figure out how you can do it better. Know what your unique selling point is and make sure it is always true so customers know what to expect from your product or service. In general, products and services are either a ‘need’ or a ‘want’ – we don’t get too excited about the things we ‘need’ so if your idea falls into this category you need to be either the cheapest/fastest/easiest or otherwise most convenient option. If buying a successful business or franchise, make sure you can keep up their reputation for whatever their unique selling point is. Failure to do this will lead to disappointed customers as mentioned above.

Obviously there is a huge range of reasons to attract customers for things they ‘want’ but don’t need – too many to list here but in short ask yourself how their experience buying from you/ using your service will be more pleasurable than that offered by competitors.

 

Where most businesses fail... Know your finances

Unlike being employed, your income can fluctuate and it may take time for the business to start making a profit. Statistically, around a third of businesses fail during their first year and this is usually due to cash flow. Spend time carefully predicting what could happen, including all costs that will need to be covered until the business makes enough money and try not to overestimate anticipated profits.

 

Buying a business

Know what you are paying for!

Compare the price against other businesses on the market, do not just take the owner’s word for what the business is worth!

When negotiating on price, make sure you know what you are getting included in the sale. Once an offer has been made, follow it up in writing, stating ‘subject to contract’ and request any conditions of sale for example:

• Whether tangible assets are included such as equipment and furniture
  
  
• Are intangible assets included, such as the brand and customer lists
  
  
• Does the sale include stock?
  
  
• Do you want the owner to stay on for a period of time post-sale to help with handover issues, introduce you to contacts etc.

 

Seek indemnity – don’t be held responsible for past issues

When purchasing a company, there’s a chance you could be held liable for issues that occurred prior to taking over, leaving you out of pocket. For example, if someone tries to sue for something which you didn’t know happened before you took over the company, or perhaps wrong tax amounts could have been paid and you’ll be expected to fund the rest.

To ensure you won’t be held responsible for these unknown liabilities, you could make it a condition of the purchase that a deed of indemnity agreement is secured with the vendor. This will ensure they are obliged to meet any liabilities that come to light within a period post sale.

 

Find a solicitor you can trust

NEVER pay the seller directly! Use a solicitor to pass the funds to purchase the business to the seller’s solicitor.

 

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