Dec 162011

Buying a business can be a great idea – but you need to be careful

One of the options when going into business for yourself is to buy a going concern – a business that someone else has set up, done all the hard yards on, and now (for whatever reason) wants to sell.  Although this might sound like the easy option there are a lot of things you need to keep in mind to avoid expensive mistakes and a lot of heartache.

Finding out who’s for sale

Businesses are usually sold via Business Transfer Agents (BTSs); these specialist companies are effectively estate agents/realtors for businesses.  Like estate agents/realtors their primary aim is to sell the business for as much money as possible for the person they’re acting on behalf of – the seller.  BTAs can take between 6 and 10% of a sale price so will generally want to ‘big up’ the benefits of the business and its potential.  Most are genuinely honest and are looking to create a win:win scenario for all parties with a fair deal but there are the occasional rogues out there (as there are in any profession) so do keep that in mind.

When starting your search for a business to buy you should do as much research on the BTAs as you do the businesses you’re planning to buy. By all means look at their Web site but don’t rely on it; look deeper.  How long have they been in business?  Are they a member of a trade body?  What qualifications do they have?  Do they have any testimonials from previous clients?  As they’re acting for the seller and not you, you’re unlikely to be able to get the seller to change agent but what this research will do is allow you to make a considered judgement on how far you can trust them.

There is one time that you can expect a BTA to be on your side and that’s when the business has been on the market for a long time.  After about 3 months on the market, interest in a business for sale rapidly drops off.  If an agent has lots of these on his books he may be open to a little bargaining when it comes to price in order to allow him to shift it and get his commission.

Why are you planning to buy?

Let’s look at the main reasons why you might be looking to buy a business.

The main reasons are:

  • You’ve just been made redundant, have a pot of cash available and want to start your working life afresh;
  • You’ve had an ‘entrepreneurial seizure’ and decided that you can do better than someone else at running a business;
  • You’ve decided you don’t want to work for someone else any more;
  • You’re downsizing from your hectic job in the city so that you can spend more time with your family/dogs/cats/llamas;
  • You’re a serial entrepreneur who makes a living from buying, building up and selling businesses and are now looking for your next project.

The chances are that if you’re reading this then you’re not the last example above because you’ve done this before, know the routine and have the battle scars to prove it!

If your reasons align more to the other examples shown then you need to read through this document carefully as it will save you many thousands of £££ and much heartache.

Why are they selling the business?

If you had a goose that kept laying golden eggs for you, then why would you sell it to someone else?  Slightly cynical but a good point to keep in mind as you search for a business.

To a true business person, there are two primary reasons why someone should start up or buy a business.  The first is to build it up and sell it; the second is to build it up, put a team in place to run it for you and then you sit back and enjoy the passive income.

Look very carefully at the reasons given in all the ads and be prepared to read between the lines and ask some searching questions.  Many ads simply say ‘retirement’; to me that generally means one of two things:

  • They genuinely are retiring, or
  • They have got to the end of their tether with the business and can’t be bothered to go on any longer.

If they are genuinely retiring then that pricks my ears up and raises my suspicions.  I then look at how long they’ve been running the business and if it’s a relatively small business and they’ve been running it for a significant period the alarm bells start to ring.  I look at how many team members or staff they have working for them.  Very often it’s just one or two or even none – which means they’re deeply immersed in keeping the business running on a daily basis.

So, they’ve been running the business for a sustained period and haven’t got it to the point where it runs without them… they’re not selling a business, they’re selling a job.  That’s not to say there isn’t some latent potential in there somewhere but you might have to work hard to release it.