Buying a Small Business or Franchise
What you need to know
So you are thinking of buying a small business.
Before you hand over the money and become the proud new owner of a small business, there are many important questions you should be asking yourself and others. This section covers most of the important areas you will need to focus on.
Before reading through this section, familiarise yourself with the short article Are you suited to small business?
Are you a self-starter?
There’s a saying:”If it’s to be, it’s up to me.” One of the main differences between a small business owner and en employee and a business owner is that the business owner wakes up every morning and thinks “What do I need to do today to grow my business?” Or “how am I going to make a sale today?”
No one else will fill your in-tray.
What are you buying?
When buying a business you may be purchasing tangible things such as stock, equipment, a location and some less tangible things such as customers and a reputation. Assessing the value of the former is relatively straightforward; not so the latter.
Advantages of buying an existing business
Buying a readymade business has a number of advantages including:
- Potentially less risk through the unknown
- Access to an immediate cash flow
- Proven processes and operations
- A proven track record can improve your chances in obtaining finance
Failure to do proper due diligence and research could result in buying a badly performing business with poor future prospects. Some specific problems might be:
- Low levels of customer loyalty or loyalty that is specific to the seller
- Equipment that needs to be updated at considerable expense
- High levels of staff turnover
- The business is in a declining industry
- Barriers to entry are falling rapidly making it easier for new competitors
Depending on the nature of the business, all of these and more could be factors that you will need to weigh in making your decision to buy a business.
What to consider
It is important to have a plan for acquiring a business, including all of the things you will need to do to affect a smooth changeover. Getting advice before you make any important decisions is essential. You need to know what to look for in financial statements and what questions to ask the seller to ensure you are very well informed about the true underlying state of the business. As an example, if you are buying a business that is substantially a cash-based business, you will need to get the accounts verified by a good accountant to be certain that the figures are telling the true story.
A checklist on buying a business can be found here.
And if you are considering buying a franchise you will find some excellent resources here.