Buying an established business that someone else wishes to sell provides a path that many follow to fulfil the desire to enter into business or expand existing operations. Like buying a second hand car or house the need for care and due diligence is essential as this could represent the opportunity to achieve ambitions, but could also be the route to financial disaster, as Lloyds Banking Group discovered after they had acquired HBOS – seemingly with little attention to the financial situation of their acquisition.
Advantages of buying a business
One of the main reasons for buying an existing business is the partial elimination of the time and stress in establishing and growing a business. While the initial outlay may be greater this is almost certain to be represented by underlying assets. Any deficiency in asset value is normally represented by what is known as ‘goodwill’ – the difference between the price of the business and the underlying value of the net assets. That is the price of being able to operate an existing business and generate cash flow and profits. It may also be easier to secure financing for an existing business, provided there is a positive track record and the purchaser is considered a suitable person or company for running the business successfully.
A new business may be acquired through a franchise. Other business types include internet or mail order businesses.
Disadvantages of buying a business
Often the biggest hurdle to buying a small business outright is the initial purchasing cost. As the business concept, customer base, brands and other fundamental work are already established the financial costs of acquiring an existing business are usually greater than starting one from nothing. Other possible disadvantages include hidden problems associated with the debtors or stock that may not be worth what they are valued at. Good research and professional advice are essential ingredients on the path to acquiring a business.
Other disadvantages of buying an existing business include: