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Guide to Buying an Existing Business

Just because you want to own a business doesn’t mean you must start from scratch. More and more entrepreneurs are skipping the start-up phase, a time when most new enterprises fail, and buying an existing business. When you buy a business, you take over an enterprise with a number of built-in advantages. For starters, it’s already generating profits. You’ll be able to tap into an established customer base, and you’ll enjoy the work that’s already been done to build the brand.

Buying an Existing Business – Why Don’t More People do it?

Well, buying an existing business is often more expensive than starting from scratch. The business owner has worked hard to build the company and will want to reap the rewards of their endeavours. There is a silver lining, though. It’s often easier to secure financing to buy an existing business. With a model that’s proven to work, banks and investors will feel more comfortable providing the finance you need to get set up. First, you need to zero in on the business you want to purchase.

Identify the Industry

Right now, there are hundreds of businesses for sale in British Columbia. Before you browse the selection, you must consider where your strengths lie. Don’t fall into the trap of buying a business just because it’s a “sure thing”. List the jobs you have previously worked, noting the aspects of the role you particularly enjoyed. By identifying these tasks, you can narrow your business search to compatible industries. If your background has been working as an accountant, you may not be entirely compatible with running a mechanic shop.

Once you’ve narrowed the search, read up on the required accreditation needed to own this type of business. If you aren’t qualified, what courses or training would you need to do to become accredited?

Identify the Type of Business

When it comes to buying an existing business, you have two choices: franchise, or an independent business. Each contains their own advantages.

Franchise:

  • Proven Track Record – This business has a proven record; there is less risk than starting something brand new. If you want to sell the business down the road, it may also be more attractive to prospective buyers.
  • Customer Base – Potential customers will know your business and trust your product or service.
  • Shared Assets – Operating under a parent company means the infrastructure, processes, and advertising are already in place. It’s a “colouring by numbers” approach rather than a blank canvas.
  • Rules – As a franchise holder, you have less control of the business than an independent owner. You will also have to pay a percentage of your earnings to the parent company.

Independent Business:

  • You’re the Boss – As the owner of an independent business you are free to run things as you see fit.
  • No Royalties or Fees – You keep all the earnings and don’t have to share any of the profits
  • More Opportunities, but More Risk – It’s possible to pick up an existing business that isn’t currently doing well but has potential. If you are willing to right the ship, you can reap the rewards, but you must be prepared for things to not turn out as planned.

Evaluating Opportunities for Buying an Existing Business

Each business you consider will have its own individual pros and cons. You must evaluate its condition objectively while also considering its potential. Look out for the following important aspects:

Real Estate

Look at the physical location of the business. If it’s an office, warehouse, or retail space is it in good shape? Is the equipment and inventory well cared for? If the business is online only, look at the website hosting, analytics, and security of the infrastructure.

Reputation

We live in an age where customers are empowered to give instant feedback on a business. Does the business enjoy good standing? Examine their social media channels to gauge how people feel about the business If there are complaints, do they focus on an aspect of the business? If so, can you improve it? Customer reviews offer a powerful tool to measure the popularity of a business.

Logistics

How smoothly does the business’ supply chain work? Is it located in an urban or rural area? Would extreme weather cause supply problems? Think of the worst-case scenarios and how they would play out. If you are far from your customers and suppliers it’s less than ideal. It’s also worth investigating the company’s relationship with suppliers. Is it in good standing?

Prospects

A business might have sound financials, an excellent location and plenty of positives, but if it operates in a declining industry it’s a problem. Look at the health of the industry as a whole before making a decision.

How Much Should You Pay?

Understanding the basics of business valuation will help guide this answer. This task can be carried out by Certified Business Valuators, Accountants, or even business consultants. They will provide additional due diligence and an understanding of the business’ current cash flow and transferable value. Take your time and verify the information you receive before committing yourself to a purchase.

Here to Help

No matter what stage of business, or what problem you face, Small Business BC offers a range of seminars and one-on-one advisory sessions to suit any business.

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