Buying an existing small business: 3 things to consider
Small-business expert and author Dr Greg Chapman looks at some of the issues around buying an existing small business.
You’ve decided to leave salaried life behind and run your own business. The question you’re now asking is whether to buy an existing business to avoid early growing pains. We look at three important things to explore before making the leap: the business’ customer base, its management systems and its staff.
1. Customer base
When you’re buying a business you’re buying a reputation: you don’t have to build it. The top reason people buy an existing business is to acquire the customer base, but it is important to discover whether the customers are loyal to the owner, rather than to the business. Will they stay when the owner goes?
If the customer base is already declining when you’re looking to buy, this may indicate a problem and you should take care to investigate possible causes. However, it could be an opportunity. If you can see new ways of running the business that an owner too set in their ways has missed, it might mean you could buy the business at a more favourable price.
If you’re planning to totally change the business, it may be better to start with a clean slate and a new brand, instead of trying to convert existing customers (that you’ve paid for) to your new offer.
2. Management systems
Any established business should have good systems, tested over years, enabling the owner to manage staff and to run without being there every day. This is a big advantage, especially if you’re new to business. It’s why people buy franchises.
A key part of the management system is marketing. A well-run business will have strategies that a new owner can implement to achieve a similar level of enquiries just by following the existing owner’s strategies. A new business may need to spend a lot of trial-and-error time developing such systems.
Staff are a critical asset of any business. Once the old owner departs, they will still be there to assist and advise as you learn to run the business, but they can also be a risk. If there is great loyalty to the existing owner, will the staff stay after they depart? Alternatively, if the business has not been well run, the existing staff may be more a liability than an asset, creating problems for you right from the start.
In a good business, the staff will be well trained and motivated, even if the existing owner leaves. Finding and training suitable staff for a new business is expensive and time-consuming, but if you’re going to make significant changes to the business, the retraining or, if necessary, the removal of old staff then becomes a major burden.
When buying a business as a going concern, the valuation is usually based on a multiple of the expected profit. The start-up costs of a new business are likely to be a lot less, because you’re not paying for someone’s intellectual property and goodwill.
A new business will require more time and effort from you to build to a similar size, but it will be the one you design, not someone else’s business with their legacy issues. However, if you want a quick-start business with existing customers, systems and staff, and expect to change little, buying may be the answer for you – but doing your own due diligence first is essential.