In a few of our previous blogs, we analyzed different aspects of buying an existing business. Today we will focus on what at first glance may seem obvious but in fact is not, namely the reasons for owners to sell and for buyers to buy an existing business. So, why would someone want to transfer her existing, operating and earning business? There could be a variety of reasons, generally divided into two groups: voluntary and involuntary disposal of a business.
Reasons for the voluntary transfer of business:
- The business is mature and is at the peak of its capacity;
- New Opportunities;
- Declining revenues;
- Partner disputes;
Reasons for involuntary disposal of a business can include:
- Financial reasons. For example, over-investment of a side project may result in need of cash;
- Another example of financial reasons may be a temporary low or lack of cash flow and as a result inability to pay debts despite of a good business model. In such a case, this can bring the owner to decide to sell the business to avoid bankruptcy;
- When all the other avenues are exhausted to no avail.
So far, we have explained some reasons owners of businesses may have to sell or otherwise dispose of them. Now we will outline some reasons buyers may have to buy an existing business:
- The business has immediate cash flow from day one. Buyers invest substantive amounts of money and want to be certain they can receive a return on their investment as soon as possible.
- The business has a reputation and an established brand in the marketplace.
- Existing customers are already in place.
- The risk of business failure is lower.
- There is less need for training of employees, for there are already calibrated policies and manuals in place.
- Marketing, sales and operating systems are already in place and working.
- Financial assistance is available. For example, banks and other financial institutions are more eagerly willing to offer financing to an established business rather than to a startup.
- Flowing from the above, interest rates are lower.
Of course, one should not ignore that in business nothing is certain, and nothing is perfect. While most of the drawbacks depend on the specific case and are industry-related, there is still at least one common weakness which is a need to invest a large amount upfront. Other pitfalls can be:
- The business might need major improvements to old plant and equipment;
- The business may be poorly located or badly managed;
- External factors, such as increasing competition or declining industry, can affect future growth;
- Under-performing businesses can require a lot of investment to make them profitable;
- The seller’s personality and their established relationships may be a major factor for the success of the business;
- The owner may possibly be dishonest about the business. The fact that the business is not doing well might be hidden by false statements by the owner, employees, etc. The financial statements and other documents might have been carefully camouflaged or falsified.
In conclusion, taking into consideration the current unstable and fluctuant reality, selling on one hand and buying on the other hand, maybe the right decision, provided each one of the parties, especially the buyer, receives professional advice and conducts meticulous due diligence. Our office can help you with selling or buying a business. To book a consultation, you can email us at info@vblegal.ca or call 905-370-0484.
