The Australian Small Business Blog

Monday, August 22, 2016

Buying an existing small business : smart or not?

by Dr Greg Chapman

You have just decided that you don’t want to work for someone else anymore and build their dream, you want to build your own. You know the kind of business you want and are not afraid of the hard work it’s going to take. The question you are now asking is whether to buy an existing business to avoid early growing pains. Here are threekey issues to consider before you buy.

1. Customer Base

When you are buying a business you are buying a reputation, you don’t have to build it. The phone is already ringing right from Day 1. So, the top reason people why buy an existing business is to acquire their customer base, but it’s 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, this could be an opportunity if you can see new ways of running the business an owner too set in their ways has missed. Thiscould mean buying at a discount of its value to you.

If on the other hand, you are 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 customersfor whom you have paid, to your new offer.

2. Management Systems

Any business that has been around for a while 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 are 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 spend a lot of time with trial and error to develop such systems.

3. Staff

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 they stay after he or she departs? 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 are 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 are not paying for someone’s intellectual property and goodwill. A new business will require more time and effort from yourself to build to a similar size, but it will be the one you design, not someone else’s with their legacy issues. However, if you wanta 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.

May You Business Be - As You Plan It!

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Dr Greg Chapman is the Director of Empower Business Solutions and is Australia's Leading Advisor on Emerging Businesses and provides Coaching and Consulting advice to Australian Small Business Owners in Marketing & Business Strategies Planning & Systems. He is also the author of The Five Pillars of Guaranteed Business Success and Price: How You Can Charge More Without Losing Sales.

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