Small Business News - Summer 2002
Learn to buy the right business
By Marcus Markou of www.BusinessesForSale.com
Most businesses take many years of hard work to establish. Buying an operational business can be a good way of saving you, the would-be entrepreneur, the exhaustion and disappointment of starting from scratch. It is estimated that 90% of the 300,000 UK businesses that start up every year fail. The rationale of buying an existing business is that your chances of failure are reduced as you will be buying a ready-made customer base, revenue streams and even staff - whether you are looking to buy a florist, pub, restaurant or sports shop.
However, buying a business can also be fraught with difficulties. Buying the wrong business can be a costly mistake.
1. You have to decide what you want...
If you want to buy a business, you have to ask yourself some searching questions regarding your priorities. You will have to understand where your strengths and interests lie, how much capital can you access and what types of businesses really excite you.
How independent do you want to be? Maybe buying a franchise could be a good way into business ownership. Whilst you won't have as much creative freedom you will gain more security.
Are you mentally prepared for business ownership? Running your own business will take up a great deal of your time and energy.
What skills to you already possess that will be useful to you? Do you have any specific skills that could transfer into the business you will be running?
2. Looking for the ideal business...
Finding the right business for sale is not easy. You must be totally convinced that the business you will buy is the right business. For example:
You can find business for sale adverts in local newspapers and trade magazines.
Business transfer agents or business brokers, like the equivalent estate agents for homes, represent business owners looking to sell their business. Some of these business transfer agents will specialise by sector (for example, pubs, care homes, hotels) and some will specialise by geography.
On BusinessesForSale.com we have over 10,000 businesses for sale - ranging by sector and geography. Most of these businesses are in fact represented by agents.
3. Evaluating the business...
You will need to ask some searching questions to make sure the business you end up buying is the business that was being offered for sale in the first place. Satisfying yourself and doing the investigative work to make sure you know exactly what you are buying is absolutely essential. You must work like a detective - whether you are looking to buy a pub, a clothes shop or takeaway. Leave no stone unturned in truly knowing every aspect of the business you are about to buy.
How was the business started?
How has the business changed?
How does the business attract its current customers?
What do the financial statements say? Can they be verified?
Note: When evaluating a business it is advisable to hire an independent business evaluator to make sure everything is checked thoroughly.
4.Financing the purchase...
When buying a business you are usually required to make a down payment - a deposit - which is typically 10% to 40% of the selling price. However, you must plan ahead and make sure that you have adequate working capital sources once you have purchased a business. If you do not have the funds needed for the down payment readily available, you must look for financing from an outside source such as loans from family or friends or a bank. The vast majority of businesses, particularly smaller businesses, are purchased with a significant portion of the purchase price financed by the owner.
Many first time buyers look to raise the money for a business purchase by selling their home and buying a business that also comes with accommodation. So, for example, businesses such as post offices, hotels and even antiques shops or dog kennels often come with living accommodation. This is a particularly attractive way into business ownership if you are in a position to realise increases in the value of your current property.
For example, the average cost of a semi-detached house in London is around £230,000. For £230,000 you can buy a 7-bedroom guest house in Devon that comes with three bedroom owners accommodation. You may not be able to buy the property outright but realising the equity in your home may provide you with the deposit you need in order to raise further finance from a bank. Also, because you are buying a property based business you will be able to guarantee any loan from a lender based on the value of the bricks and mortar. If it's a good business and you've done your sums correctly you should be able to pay back the lender on a monthly basis whilst leaving you enough to live comfortably. All this is done whilst also providing you a home. This is why hotels, care homes, post offices and pubs are popular purchases - because they often come with living accommodation.
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