Buying a business – the pros and cons

When most people talk about starting a business, they mean setting up a company from scratch.

In many respects, that’s one of the hardest ways to get going in business, as you have to do everything for the first time and make some pretty hard decisions along the way.

One popular alternative to starting your own business from nothing is to buy a franchise, where the operations and marketing systems have already been worked out, tested, and proven to work.

The major downside of a franchise is that you won’t have as much control as you would with a business you started yourself.

Another option is to acquire an existing business. You will be buying an operation with products, customers and staff already in place. But at the same time, you will have full freedom to make whatever changes you want to as the new owner.

Here are Bytestart’s pros and cons of buying a business.

The upsides of buying a business

• The business idea and model will be proven, and the market for it will be well established.

• There will be an existing customer base. This will be important to leverage if you wish to grow the business.

• The business will have years of evidence available to you to understand how the market reacts to competitors, new products, etc. This means you are less likely to make mistakes or stumble across problems people starting new businesses will face.

• It will have a reputation (hopefully a good one) and a trading history in its sector. This can help offset any lack of knowledge in the industry when you buy it.

• There’s no need to sit down and try to work out a business and marketing plan, or guess at forecasts for the year to come. You can use historical data to help look forward more accurately.

• When you buy a business, you typically buy the team too. Those employees will have years of valuable experience and knowledge you can leverage.

The downsides of buying a business

• Someone selling a business will have invested a great deal of their own money, and even more of their own time. And that means they will want to generate a significant amount of money in return for ‘losing’ their business.Depending on the kind of business, buyers typically pay a multiple of the turnover. If the business has a turnover of £100,000, you may pay as little as £30,000, or as much as £200,000.There is no magic formula to establish the value of a business, although standard valuation methods do exist. Our dedicated guide on
• How to value a small business tells you more about this tricky area.

• On top of that, you’ll need to pay for professional advisers such as an accountant and solicitor. Fees can become quite large – bespoke advice isn’t cheap. You need to be sure that you’ve covered all bases before committing to a purchase, so such fees are an unavoidable expense.

• If the seller has focused more on the sale than the business, there’s a chance it may be a little run down. They will certainly have taken advice on how to get the most financial value out of it before and during the sale. It means you may have to invest more than the purchase price to get the most out of it

• You will be bound to all existing contracts, including with employees, suppliers and customer. All existing contracts will need to be checked carefully during the due diligence process.

• Taking on staff someone else hired can be an interesting challenge, especially if the seller was very popular within the business. Watch out for staff leaving to join them in a new business venture, taking the expertise you have paid for elsewhere.

If you decide to press ahead with purchasing a business, make sure you read our Top 10 tips before buying a business.