4 Tips For Buying An Existing Business
Published 3:23 am 9 Sep 2019
Most entrepreneurs don’t know that sometimes it’s better to buy an existing business than starting your own business. In this article, DG Institute founder and CEO Dominique Grubisa provides tips on how you can do that, even if you have no money but want to start a business.
When buying a business
Most entrepreneurs believe that starting their own business is the only option open to them.
Well here’s a different business advice that might shock some entrepreneurs.
They don’t know that it’s often easier taking over a business that’s a going concern and steer it.
That leads to them sinking hundreds of thousands of dollars into their ventures. This is despite the fact that they could take ownership of a business without money.
This article explains a few of the techniques that you can use to do that. Before that, let’s look at why buying a business is the better option in the first place.
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The Problem With Start-Ups
The simple fact is that the vast majority of Australian startups fail.
According to the Australian Financial Review:
“An oft-cited rule of thumb is that anywhere from three-quarters to 90 percent of all start-ups ‘fail’, which is to say they don’t make it to a trade sale or IPO, and are wound up.”
Often, an entrepreneur will have a brilliant start up business idea that they’re extremely passionate about. However, they won’t have the money required to get that idea off the ground. That means they go to the bank and borrow or they take out another mortgage on their own home.
This leaves them under a mountain of debt that they need to clear before they can become a profitable business.
The owner runs out of money and they end up contributing to the above statistic.
The Better Business Venture Option
An airplane uses the lion’s share of its fuel during take-off. Once the plane is in the air, it can go into autopilot and the fuel consumption drops dramatically.
Businesses work in the same way.
Starting a business is hard it takes the vast majority of your effort. You have to find the money to start it and put everything in place to drive revenue. However, things get a lot easier once the business is up and running.
That’s why buying a business is the better option. When you buy existing businesses, you don’t have to lodge the crowbar underneath it and do all of the heavy lifting. Even if it”s buying a distressed business, it has almost everything in place already.
The advantage of buying an existing business means for a smart business investment which far lowers investment of time and money on your end if you can take ownership of such a business.
This is what the savviest people in business do. Instead of starting their own enterprises, they buy existing businesses and make tweaks to turn a profit.
Why is Now the Time?
Australia used to have a culture of punishment for businesses that found themselves in distress. The laws wouldn’t allow them to trade while insolvent and company directors took direct responsibility for the business’ debt.
This led to a range of problems. For example, a business could experience a temporary cash flow issue. Even if the business had plans to rectify the issue, the owner had a duty to go into administration or liquidise the business.
The Productivity Commission examined this situation in 2015. They made several conclusions, including the following:
“A ‘safe harbour’ defence should be introduced to allow directors of a solvent company to explore, within guidelines, restructuring options without liability for insolvent trading.”
As a result of these findings, Australia created ‘safe harbour’ laws in July 2018. These provide business owners with a set period in which they can restructure an insolvent business.
These owners can now put in place a business problem solving solutions to fix the issue. Those plans may involve having somebody like you to take ownership of the business to solve the business problems and make it solvent again.
What This Means for Business Buyers Like You
This simple change to the law has created a large number of motivated sellers.
It creates the opportunity for you to step into a distressed business without any risk of doing damage to yourself. With the right strategies, you can turn that business around and make a profit.
Beyond this, it’s still eminently possible to acquire a going concern that’s turning a profit.
In Australia, we currently have a supply and demand mismatch in the business world. There’s an entire generation of profitable company owners who want to retire.
Many of them can’t find someone to buy or take over the business. What happens is that they end up closing the doors and walking away.
Again, this provides a clear opportunity for you. It might be better then creating your own business from the ground up.
Now, you need to know how you may be able to take advantage of that opportunity, even if you don’t have finance. Here are four tips that may help you to do it.
Tip #1 – Step Into a Failing Business
You have the option of obtaining a failing business that the owner wants to walk away from.
In this scenario, you take over the business and stop all payments going out. You’ll speak to the previous owner’s creditors and talk to them about your plans. You’re going to step in and take an in-depth look at understanding the business. While you’re conducting this review, you’re going to cease all debt repayments as you come up with a business solving solution.
Remember that the onus is on the creditor to chase the debt that the previous owner created. Now that you’ve taken over, they can see a potential light at the end of the tunnel. This means they’re likely to grant you some time to look at how to restructure and plan the business.
During this time, the business still operates. This means you’re building a war chest of funds that you can use to negotiate with creditors new payment plans. You may be able to arrange a new repayment schedule or even negotiate a deal that sees you pay pennies on the dollar of the previous debt.
Tip #2 – Use Vendor Finance
This is an option if you’re stepping into a profitable business where the owner wants to retire.
With vendor finance, you create an arrangement wherein the previous owner receives their money over time.
For example, imagine that the owner wants $400,000 for the business. Instead of paying that up front, you can create a plan where you pay a certain amount each month until you reach the desired figure.
Tip #3 – Work Into the Business
It’s possible that you have skills that a business will find desirable.
For example, you may have a lot of IT experience, which a business that hasn’t gone digital yet will find valuable.
This allows you to work into the business. You could create a structure where you buy into the business by receiving 50% of the shares to enter the business and implement your expertise. The owner then has the option of buying back those shares or allowing you to buy out their shareholding.
You’re creating a win-win situation in business while gaining more experience that you could take elsewhere if needed.
Tip #4 – Improve Business Efficiency
Whether it’s a profitable or distressed business, you can use your skills to leverage your way into an ownership position.
For example, you may be able to come in and plug some holes in the bucket. This may involve creating business efficiency such as cutting unprofitable product lines and simplifying things so you focus on what works.
The key is that you can bring something into the business that leads to a profitable business.
Create Your Path to Business Ownership
The key takeaway here is that creating your own business is not the only option open to you. In fact, that may be the most dangerous option in a climate that makes acquiring a business easier than ever.
These tips may help you to achieve an ownership stake even if you have no money.
Purchasing a business is a big decision. If you’re looking to learn how to takeover and turnaround businesses for profit then register now for our Exclusive Webinar Briefing.
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