Almost all the advantages (below) have, on their flipside, a corresponding disadvantage.
The most important question to bear in mind when buying an existing business is WHY the existing owner wants to sell it! It will often be because it is failing or unprofitable or under-performing or simply very hard work for very little return.
Of course, there are genuine opportunities – for example, when the existing owner wishes to retire or is suffering from ill health but, in my experience, these tend to be the minority of cases.
So, once you’ve answered this question, the next is how you can improve the position and make the business a success.
Advantages to buying an existing business
- Somebody else has already done or paid for all the start-up work – setting up the company, finding and renting premises, employing staff etc
- The market for your goods or services should have been established
- The business should already have plans, accounting policies and operational procedures in place
- Buying a business can give you the benefit of immediate cash-flow rather than forcing you to fund both yourself and the business for what can be a long time before it becomes recognised and profitable
- The business should have a financial history
- As an established local business, it might make it easier to obtain local finance. However, in practice, local banks and others are usually reluctant to lend to a business that is under new ownership
- You should have an existing customer base
- You should have an existing network of suppliers
- You will probably have existing staff
- You should have all the plans and equipment needed to do whatever you do
Disadvantages to buying an existing business
- It is an existing business. It will have processes that you’re likely to want to change, it will have staff who may not be appropriate.
- The owner might decide to open a competing new business just around the corner. It is important that this is prohibited in your contract.
- Your staff may well be loyal to the old owner and leave shortly after he sells to you. In many businesses, particularly bars and restaurants, the staff are a key component and a major influence on why people come to you.
- Turning around an underperforming business is often much more complicated and time-consuming than building a new one.
- You will often be taking over not only the business but any debts or claims that might exist against it and you will never be certain that you have fully identified the risks involved.
However, probably the most important disadvantage of taking over an existing business is that you’re likely to have to pay a substantial amount for it – and this will need to be funded.
Are you the right person to take over the business?
Do you have the skills and attitude required to run this particular type of business? Are you better suited to developing an existing business or to creating a new one?
Two things you will need to be particularly good at (and be honest with yourself about them) are:
- The ability to analyse what has been done in the past and work out whether it’s the best way for the future – but without changing everything, because then you might as well set up a new business
- Managing existing staff who may be loyal to the old owner – do you have the interpersonal skills to bring them ‘on side’? Completely replacing staff can be costly and damaging to a business
Do you have sufficient funds?
You will need to make a detailed assessment not only of the cost of acquiring the business but also the money needed to turn it around and then run it.
Unless you are very familiar with business life in the country you’re looking to buy a business in, it’s probably worth speaking to a local accountant as soon as you become seriously interested in taking over an existing business. The accountant will usually have some form of spreadsheet giving you all the major financial headings that you will need to think about. Some of them may be different from what you’re used to back home.
Finding a business for sale
Here there is a bit of a conundrum. The best businesses do not have ‘for sale’ signs outside their premises and they are usually not advertised in the press or even through specialist business agents. They tend to be passed on by way of personal contacts and word of mouth.
You can often find a specialist business sales agent, and they are often well worth consulting – not just because of the businesses advertised by their companies but also because of their network of connections and their knowledge of businesses in any sector that could well be for sale if an appropriate buyer came along.
Other useful sources of useful information about businesses that might be for sale are your own personal contacts in the area, your lawyers and your accountants.
Preparation for buying a business
Once you have identified a business that you would like to buy (or possibly a shortlist of suitable businesses), there is some initial preparation that you will need to undertake. In fact, some of it is best done even before you have identified a potential purchase.
Appointing professional advisers
You will need both an accountant and a lawyer to buy your business. Trying to do without either of these is a major (and possibly fatal) mistake.
Depending upon the nature of your business, you may need other advisers. For example: a hotel consultant or a specialist tax adviser.
Checking your finances
If you’ve not already done so, you need to work through the spreadsheet containing your financial projections and – erring well on the side of caution – make sure that you have access to all of the funds that you need.
This could well be the time when you approach local banks or other lenders.
If you are approaching lenders (other than, perhaps, your own family), you are much more likely to be successful if your financial plan is prepared in the format and with the headings that are usual in the country in which you will be doing business, rather than those which might be usual in your own country. If you have prepared your spreadsheet showing all of the necessary figures in the format to which you are accustomed, your accountant will be able to convert it into the usual local format.
You will also be more successful if your business plan and financial projection is prepared in the language of the country you’re operating in or, at least, in bilingual form.
You will not be able to make a formal application for finance until you’ve identified a specific business opportunity but it is useful, at this stage, to make sure that your initial plan – which will have to be updated once you have a specific opportunity in mind – is going to meet the sort of criteria that they usually apply.
Do not forget that if you are a foreigner with no previous experience in the country you’re buying in, it is going to be very difficult to persuade a bank to lend to you in order to buy an existing business or start a new one. This is so even if you have lots of assets you can use as security for the loan.
A few years ago, in the crash of the mid-2000s, it was close to impossible in many countries – but the banks are now becoming a little bit more adventurous and may be prepared to lend in the case of well-established businesses with a good financial record and where the new owner can show relevant experience and a significant asset base.
The main things that the banks will be looking for – in descending order of priority- are:
- Will you be able to service the loan?Will you be able to repay both the interest and any capital repayments? The bank will usually want to see this funded from the activity of the business itself but, during the initial phases of the loan, will probably be happy if the money is coming from some other source such as your savings or other income. However strong your financial position and however much security you might have, they will not lend to you if you cannot service the loan.
- Do you have adequate security?The bank will want to see that its loan to you is protected. Ideally, this will be by way of a mortgage/legal charge over real estate (property) that you own. In some cases, it can be some sort of legal charge over other assets that you own or over cash that you have deposited in their institution.
- Do you have the necessary management and business skills?Your CV is a very important part of your application. In some countries it is not unusual for the CV to be supported by references from known business leaders.
- Does the business have at least three years of accounts?The bank will want to see the business’ accounts and tax returns for the last three years. This can be a problem as, until fairly recently, it was commonplace for businesses to understate their real income because this would reduce the amount of tax they had to pay. If the seller has adopted that policy it will now come back to bite him. It is very difficult to persuade the bank to rely on any figures apart from the official figures.Fortunately, this practice really came to an end almost ten years ago and so you’re not likely to encounter it; but some traditional owners, particularly owners of older businesses, have stuck with this traditional but completely illegal way of doing things.
- Do you have realistic profit & loss and cash-flow forecasts for the next three years?The bank will want to see your profit & loss and cash-flow forecast for the next three years but it will also want to see the assumptions you have made about any increases in income or reductions in cost and the evidence supporting those assumptions.
Even if you can meet these requirements, your application for funding will be aided greatly by the assistance of your accountant or business adviser who is likely to know the peculiarities of the individual banks and bank managers concerned; and who will be able to present your application in the best possible way. In fact, he may also be able to suggest better or more appropriate institutions for you to approach.
Research on a particular business
Once you have found a particular business (or businesses) of interest to you, you will need to do your own research in order to satisfy yourself that the opportunities are worth pursuing. Most of this you will be able to do yourself but some parts might be aided by your accountant, business adviser or lawyer.
Checking the location
Some businesses have very specific requirements as to their location. If they’re in the wrong place – even if it’s only 100m away from the right place – they’re not likely to succeed.
You can normally research the suitability of the location yourself: often by checking what your potential competitors are doing.
The requirements for your business will be specific to the type of business. See our other guides on doing business.
Checking the premises
Do the premises meet your requirements? Is access satisfactory? Do they have the necessary power supply? Do they have the right number of toilets? Are the terms of the lease satisfactory?
There are many issues to be considered here. You will usually consider them with your lawyer. Guides.Global has a business premises checklist which may help you with this process.
Who are your competition? Why are they successful? What are they doing that is different from what the business you want to buy is doing? How can you improve your business to better them?
Try the business’ products or services
It’s best if you get someone else to do this for you on an anonymous basis.
Try to validate the figures produced by the business
This is particularly true of income. If, for example, a bar claims to be taking €2,000 per night, get someone to sit in there for an evening and work out the actual takings.
Check the business’ marketing materials
You will probably want to change them – but are they aimed at the right sector of the market, and are they hitting their target?
Of course, today the website will be a main means of marketing but also don’t ignore the business’ activities in the realm of social media.
Check the local demographics
Is the market at which this business is aimed growing or shrinking? Are there any other upcoming markets that you will want to focus on?
Research industry and market trends
If you are new to the country, this is an area where you may need some help from your accountant or business adviser.
Why is the business for sale?
You will have already asked the seller this question but it’s also worth, subtly, asking the business’ staff, customers and suppliers and also your own professional advisers.
Talk to the business’ customers
Are they happy? What improvements would they like to see you make? Will they continue to come when the old owner has left?
Research online reviews
These are becoming more and more important and can be found in most countries.
Talk to the business’ suppliers
What do they think of the business? Has it been a reliable customer? Have they paid on time? Will they still supply the business after you’ve taken it over? What suggestions can they make as to the ways the business can be improved?
Carry out some checks on the business
These would include a credit check, a check that the company is up-to-date with its filing of taxes and that it does not have any debts or court judgements registered against it. This is usually work that will be done by your lawyer.
Due diligence is simply the process of checking that what you’ve been told about the business is true and that what you have assumed about the business is true.
It is usually carried out after the buyer and seller have agreed, in principle, to the sale of the business but before a binding contract is signed.
A lot of what we have described above is really part of the due diligence process, but there are additional things that you (and your lawyers and accountants) will need to review carefully at this time.
- Accounting records
- Tax returns
- Bank records
- Utility (electricity, water, telephone etc) bills
- Bank and other loans
- Work manual or system of work
- Official company records
- The seller’s claims about the business
- Arrangements protecting the intellectual property of the business
- Non-competition arrangements (so that the seller can’t set up next door to you)
- The staff. Are they reliable? Have there been disciplinary issues? What rights do they have? Have they been paid up-to-date?
- Stock check
- The condition of any equipment that you’re buying
- Existing accounting arrangements, including internal accounting systems
- Intellectual property assets of the business – logo, trade name, website etc
- Existing contracts with customers
- Existing leases
- Credit and other checks on the business
- The seller. What is their local reputation? Do they have debts or court orders against them?
- Arrangements for any trial period – are they adequate? It is desirable that you should be allowed access to the business, preferably working in it, whilst the due diligence is being carried out.
Download a PDF copy of this checklist to print off:
Making an offer
If you’ve not already made a provisional offer, once you’ve completed these steps you will need to make an offer for the business.
There is usually a special form of words used when making an offer for a business in any given country. Therefore, although you may well have put forward the offer to the seller and agreed it in principle, the formal offer should be made by your lawyers so that it is legally binding.
The offer will usually include a price for the business and a separate mechanism for valuing any stock or debts related to the business.
Do not be surprised if your initial offer produces a counter-offer to which you then respond and your response produces a further counter-offer, especially if you’re buying in a country known for haggling (Middle East, Mediterranean etc).
It may be obvious but it is all too often ignored: decide – at the outset – the maximum amount that you’re prepared to spend and do not go a penny above it. There will always be another business for you to buy.
Remember, when making the offer, that this is not always just about money. You may be able to tweak your offer to give additional benefit to the seller without increasing the cash cost for you.
For example, it could help the seller (for tax purposes) if the sale is made over a period of several months so that part of the business is disposed of in this tax year and part in the next.
Some people are very good at negotiating deals like this. Others are not. If you are not naturally comfortable with it, you might want to bring in a business adviser or negotiator who is. That could be your accountant or lawyer; or it could be another person altogether, often suggested by your accountant or lawyer.
The formal purchase contract
Once your offer has been agreed you will need to prepare all of the formal legal documentation relating to the transfer of the business.
At the very least, this will be a contract. It will often contain many clauses covering not only what you’re buying but also indemnities in respect of any debts or problems relating to the business, clauses restricting the seller’s right to compete with you and so on.
This is definitely work for your lawyer to do. It varies a lot from country to country.
Before you can draft the contract, you will need to decide upon the basic structure behind your takeover of the business. This, again, is something about which you should seek your lawyer’s and/or your accountant’s advice.
There are, usually, two basic ways in which you can buy an existing business.
Buy the assets of the business
When you take over a business by buying its assets, you simply buy the things that you want. These might include the lease on the premises occupied by the business, the equipment used in it, the goodwill of the business and its intellectual property rights.
You would not be taking over responsibility for any of its debts or any disputes relating to the business.
However, if you take over a business in this way it is still likely that you will have to take over responsibility for the existing employees of the business or, at least, any who have been working within the business for more than 12 months. They would have the right to have their contracts transferred to the owner of the new business and so you would need to make sure that any sums due to them were paid by the old owner before the takeover.
Buy the shares in the business
If you take over a business by buying its shares (which you can only do if the business is being run by a limited company) you take over absolutely everything in relation to the business. This would include any debts or disputes.
There are clear advantages and disadvantages in both courses of action.
There is usually a lot less risk in taking over just the assets of the business. However, there can be significant tax and cost advantages in taking over the shares in the company. These arise, in the main, because you do not need to change the legal ownership of the premises (and so avoid any property transfer taxes involved) and you do not need to negotiate transfers of leases or register the change of ownership of any of the assets of the business.
It is very important that you take advice from your lawyers and/or accountants as to which means of buying the business will better suit your needs.
Delivery of the business
This is the final stage in the process and a very important one.
In the contract of sale that you have signed there will be a date for delivery of the business. It is my personal view that it is best if this is as soon as possible after the signing of the contract, ideally on the same day. This is to stop the existing owner doing anything that might damage the interests of the business prior to delivery. However, this is sometimes not possible. For example, you may need a licence to run the business and be unable to apply for such a licence until you are the owner of it.
On delivery of the business there will be a series of further checks that you will need to make. These will include repeating the check that the business and its assets do not have any debts or court judgements registered against them; and the mundane but important task of checking that what you have agreed to buy is actually present and delivered to you. Accountants often work with people whose job is to carry out this sort of check on your behalf and it can be well worth using their services because they do it all the time and know exactly what to do. However, even if you’re going to do this it’s a very good idea that you should be present while the exercise is carried out. You can learn quite a lot!