Purchase An Existing Business or Set Up A New One?

Buying a business requires certain parameters to be take into account. You need to focus on a strong and reliable project especially if you are looking to investors, or if you want to apply for a loan.

Starting a business from scratch could seem harder than buying an existing business which already has an existing customer base and a tried-and-tested business formula. But the end parameters for buying an existing business are the same as starting a new one if you want to be sure to get a loan from the bank then you need to have a viable project. Two of the most important steps in the Due Diligence exercise are (1) intelligence gathering and (2) negotiations.

By following these fundamental principles you will have a good overview of what you need to scope out before committing to the investment.

Step One involves looking at the potential investment, from the people behind it to its accounts and business plan. This allows for an informed decision and a clear outline of where the business is heading. It also establishes how your investment will be utilized within the business, and how profitable it will be.

Due diligence requires you to meet as many of the people in your potential investment as you can. By getting to know them separately you will get a wide understanding of the business’s make up. You should also check out the business plan. and investigate whether it is viable.

Finally check the accounts to see the situation of the business and look at what sort of financial inputs and outputs are involved. Getting a loan will be easier if you write a comprehensive business plan, which should include information such as the ideal size of the business you are looking for, the minimum level of profitability you will accept, and the minimum level of income you require from the business, and budget breakdowns. Banks generally look at accounts going back 3 years.

Step Two focuses on the negotiation and use of the SWOT analysis: Strengths, Weaknesses, Opportunities and Threats – to figure out the competitive landscape and the position of the investment within it. Look at what the potential market is and what opportunities might occur. Be sure of what your position is going to be in the business (i.e. voting rights, amount of shares, liability, etc). Also negotiate on management information make sure you will be informed of updates and briefings and how often that should occur.

Getting finance from banks or venture capitalists for an existing business can be easier than when starting from scratch, especially if it has a solid track-record. But even in the case of an existing business you can have difficulties if there are few assets to tie the loan to, as this will increase the risk. If the business is not successful at the time you buy it, it will be harder to raise the necessary loans. Showing that you have good management skills could also help to secure a loan. Moreover getting a loan will be easier if you can show that you are not paying over the odds for the business compared to its real value that will give the bank an indication on your capability to run a business. It can be useful to check similar businesses for sale and measure the purchase price against the returns you expect to make within a certain period.

If you are not put off from obtaining a loan, the purchase price will be open to negotiation. Some banks allow you time to settle into your new business, and repayments can be deferred for up to 6 months. Finally, a franchise can be the solution that offers a greater chance of surviving the first 3 years compared with other new businesses.

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