First of all, what does it mean by buying a business?
Buying a business is exactly what it sounds like. The buyer takes over full ownership of the business, including factors like an established customer base, fully trained employees and well-defined operating procedures. Almost any kind of business could be bought or sold regardless of its nature.
The Benefits of Buying a Business
One of the biggest benefits for entrepreneurs to buy over an existing business is to reduce start-up costs and hassles. In terms of hardware; shops selection, decoration, equipment, licenses, suppliers, employees and operational procedures are inherited from the previous owner. And when it comes to soft infrastructure, you will take over the existing brand and reputation, pre-established customer base, and the operating flow. Buying an off-the-shelf business saves both money and time. Having a decent customer base and good reputation can increase the chance of success, and speed up the return of capital. You can also buy a poorly performing business at a low cost, and make improvement to generate better revenue.
Buying the Assets or the Entire Business?
Before drilling deeper, let’s take a look at other types of transferring a business. Buying just the assets is a common type of business transfer, also known as “Asset Transfer” or “Buying the Shell”. The transaction covers decoration, equipment, licenses, shops, etc., which reduces the time and cost required for opening the shop for business. Compared to starting from the scratch, buying assets can reduce risk and uncertainty. The loss is manageable even if the business turns out to be unsuccessful, as you might need to spend more on a brand-new start-up. The seller can also choose to sell the brand along with the hardware. The price might be higher with a well-established brand image, but having said that, running a business under a good brand name is also easier. Do note that the Asset Transfer does not include a successful business model, so after taking over the business, you also need to work out your own way to operate.
Buying the company, however, works bit more different than buying the assets. While the latter only focuses on the hardware, buying the entire business focuses more on the soft infrastructure, including branding, customer base, word-of-mouth, business model, business network etc. As a result, buying a company is not just taking over the hardware, but also “inheriting” the success of a high-quality business model. The price for a well-managed business could be expensive compared to a fresh start-up, but on the other hand, the existing business tends to be more stable.
Why People Sell Their Profitable Business?
Many people have doubts about the sale of a business. Why sell a business if it’s making money? Of course, we cannot rule out that the business chooses to sell because of poor management, but the seller may have the following other reasons:
- Developing other businesses,
- Changing lifestyle.
In fact, most sellers are emotionally attached to their hard-earned efforts, and they will not part with it unless necessary. They also hope that the business will thrive after the take-over, and sometimes sellers will check whether the buyer is appropriate candidate.
What do I need to prepare before buying a business?
First of all, entrepreneurs must first have a positive entrepreneurial attitude, because being a boss is very different from an employee. There’s no long stable income like a monthly paid employee for the business owner, profit and loss fluctuates depending on many factors. Entrepreneurs need to be mentally prepared for the worst. In addition, you need to budget sufficient cash flow; and understand the market conditions of the industry, relevant regulatory requirements and prospects. For the business you are interested in acquiring, research the company’s background, license, financial status and goodwill, and any past negative press.
Should I Sell Through a Business Consultant?
People can choose to market their business for sale through many channels, for example, social media like Facebook and WhatsApp. This method is fast and convenient, and a good way to skip paying commissions. However, a direct transaction between buyer and seller imposes a lot of uncertainty. The buyer needs to perform a check-up of all matters related to transfer of license leases, employees, equipment, decoration, follow-up responsibilities, etc. The seller will need to deal with a number of inquiries, of which only very few is legitimate. It takes a lot of effort to verify if the potential buyer is a suitable candidate to take over the business.
Engage a business consultant for a stress-free process. A reputable business consultancy firm will remain neutral, protect the interests of both buyers and sellers, and ensure clear and valid terms of the sale and purchase agreement. In addition, most of the settlement procedures are followed up by business consultants to ensure the smooth settlement process, and a good match of successors.
How Does it Work?
Firstly, the buyer indicates their interest in a type of business. There will be initial understanding between the consultant company and the buyer on the budget, background and experience. A list of suggestions will be presented after the pre-analysis. Any further detail requires a signed NDA (Non-Disclosure Agreement).
The consultant will further explain the interested listing by arranging site visit and a face-to-face meeting with the owner. The seller will have a chance to determine the buyer’s suitability, while the buyer can learn more about business operations instead of just the figures. Towards the final stage, a Sales and Purchase Agreement will be executed between the buyer and seller, which is revokable if either party is proven to be untruthful or negligent of the data they provided. A full financial review might be conducted depending on the arrangement.
Valuation of the business takes into account many factors, including historical financials, cash flow, asset and equipment values, site conditions and lease terms, business location, competitors, and the economic environment. The consultant company also reviews the recent transaction price of similar companies to come up with a suggested value.
Down payment will be forfeited if the buyer chooses to back out at the last minute, the same applies to the seller. In addition, the seller needs to sign a Non-Competitive Clause to ensure that the he doesn’t open the similar shop in a neighbourhood for a specified period of time. To protect the interest of both parties, the potential deal should not be announced to existing customers or employees.
After the signing of the Sales and Purchase Agreement, the consultant will assist in matters related to the transfer of leases, licenses, shares, etc. and business ownership. The consultant company will also provide after-sales service for smooth transition after the completion.
Come Speak with Us
You should now have a good idea of the next step for your venture into entrepreneurship. It takes a lot of courage to do everything on your own. We have seen too many small businesses struggle and close down in the span of one to five years. If you consider the alternative of acquiring an established business with a proven track record, vetted business model, established customer base, and well-trained and experienced employees, come talk to AGPS. Let us witness your success in the near future.