What Is Buying An Existing Business

What Is Buying An Existing Business?

By Russell Bowyer

Buying an existing business, is where one entrepreneur takes over a business, from another entrepreneur.

Buying an existing business means the idea is already proven to work, the business has customers, it is cash flowing (if you’re sensible, and buy a cash flowing business), it will already have employees, it will have all the equipment it needs to operate, reliable suppliers and a good reputation.

The benefits of buying an existing business include:

  • The idea, has already been tested and proven to work;
  • The business will have existing customers;
  • The business will be cash flowing (if you are sensible, and only buy a profitable cash flowing business).
  • It will already have employees, working for the business;
  • It will have all the equipment it needs to operate;
  • It will already have reliable suppliers;
  • The business will have an established reputation, which will hopefully be, a good one (but if it doesn’t it’s probably best to avoid buying it in any case), and a reputation, that can be built upon, by the new entrepreneur…which could be you.

Which means, you don’t have to reinvent the wheel.

It also means, you buy a ready-made cash flowing business…to replace your 9-to-5 job, or, add cash flows a business you already own.

And on top of that, it also means you save yourself at least four years of your life, which is what it takes, on average, before a startup business becomes established and profitable.

Don’t get me wrong, there’s nothing wrong in starting a business, as I’ve started a few in my entrepreneurial career, but startups are notoriously risky, with over 70% failing, within the first five years.

Which means, if you buy a business, that’s already been trading for five years or more, you’ve just removed one of the biggest risks there is of operating a business, which is the risk of business failure!

Whether you start a business, or if you buy an existing one, you need to be a certain type of person, to be an entrepreneur.

And, with that in mind, you may wonder whether you’re cut out to operate a business. You may question if you have what it takes to be an entrepreneur.

In reality, as with anything, there’s only really one way to find out, and that’s just, to do it.

I’ve done both, and I have to say neither is easy, because if it was, everyone would be do it.

So, how do you decide, which is better? Let me try and help you.

If what is holding you back, and, where your biggest hurdle is the “risk of failure”, then I’d say, buy a business, simply because the business has already passed the 5-year 70% failure window (assuming you buy a business, that’s at least 5 years old).

And also, if it’s immediacy, that’s more important to you, then it’s better to buy an existing business too.

But on the other hand, if the risk of failure isn’t something that worries you, and, if you like the idea of creating your own legacy, rather than taking over someone else’s legacy, you might prefer to start a business from scratch instead.

What might also help you, with your decision about buying an existing business, is if I explain my story of buying the business I bought.

The business I bought, was what is commonly referred to as a “boring business”.

It was the type of business that will always be around, it was a business that had been trading successful, for nearly 30 years at the time I bought it, and it had sales of over £1.6 million (or $2 million), and it was making profits in excess of £100k.

This business designed, manufactured and fitted bespoke furniture.

And, what may surprise you, is that I knew nothing about designing, manufacturing and fitting furniture, when I bought the company.

Now, that may either scare you, and make  you want to run a mile, from this type of challenge, or, what I hope it does, is to inspire you, to want to do the same.

The advantage I may of had over you, is I had already owned and run businesses before, in fact at the time I bought this fitted furniture business, I still part-owned my elderly care business too.

But on the other hand, you may already be an entrepreneur, and you might be considering the idea of expanding your business, by acquiring another one, or, you may have been an entrepreneur before, and you’re considering the possibility, of buying an existing business.

So, whether you’re an entrepreneur or not, you might like to understand, what it was that I preferred about buying this business vs the ones I’d started beforehand.

Reasons I preferred to buy an existing business included:

  • It had employees to do the work the business did, which in this case, included designers to design the furniture, carpenters to make the furniture in the factory, fitters to fit the furniture in customer’s homes, and a team to run the operation and accounts department too.
  • It had the benefit of immediate cash flows, which I enjoyed from day-one of owning the business.
  • It already had, a long list of very happy customers too.
  • The business wasn’t reliant on its owner, which meant I avoided buying myself a job.
  • The customers were buying from the brand, rather than from the owner, which is a very important factor, when considering buying a business.
  • It also already had, all the equipment it needed, both in the factory to make the furniture, and the fitter’s vans and equipment needed for fitting the furniture.

So, if you would like to own a business, you have a decision to make.

Is it a good idea to buy an existing business?

To help you decide whether it’s a good idea to buy an existing business, or not, I thought I’d compare this to starting one from scratch.

Do you fancy your chances at starting from scratch;

  • Not knowing if your idea will work.
  • With no customers, no cash flow and an uphill journey, to win customers and to build cash flow.
  • Start from scratch employing people, whilst having to do most of the work yourself in the beginning, and at the same time having to fund their wages, until the business begins to cash flow.
  • Having to source and buy brand new equipment for the business, that will be paid for out of your own funds. But having said that, you could use asset financing to buy these, but you’ll then have to fund the loan payments, until the business begins to cash flow.
  • You’ll need build relationships with suppliers, not necessarily knowing whether they will deliver their products or services to the standard you want.
  • You’ll have to begin to build a reputation for the business, from the ground up.
  • Plus, hope that you will beat the odds of start-up failures.

To do all of the above, it doesn’t take a rocket scientist, to do it, but what it does take, for anyone to achieve success, is to have;

  • Determination;
  • Confidence;
  • Communication skills;
  • To have a vision and a passion, and to carry your vision through to being successful, whilst being happy to be the captain of your own ship, and having to navigate yourself through the challenges that the day-to-day running of a startup business requires.

This journey, is not for the faint hearted!

If you’re ready for a journey, filled with learning, adapting, and building something unique, then being a start-up entrepreneur, might be the exciting path for you!

But then on the other hand, do you fancy your chances at:

  • Finding another entrepreneur’s business to buy, which has everything, listed above already in place.
  • Being able to negotiate a deal to buy the business.
  • Being able to raise the necessary funds to buy the business.
  • And then, if you buy the business, having the confidence to walk-in on day-one, as the new owner, with immediate cash flows from an already long list of paying customers, and employees to run the company for you, who will now be under your direction.

To buy an existing business, you need to have similar entrepreneurial characteristics, as you would with a startup business.

You’ll still require determination, not least to find the right business, and the right deal, in the first place; to have the confidence to walk in on day-one to a business that’s already in operation, and take-on the responsibility of the existing employees.

You will also still need good communication skills; you will still need to have a vision and a passion, to make sure the business you buy continues to be a success.

You will be the replacement captain of an already established ship, where you take control to navigate the business through any existing problems it has, and to help it navigate the challenges it will ultimately face, plus,

Essentially, the main differences between a startup company vs buying an existing business are:

  • The amount of time it takes to become established;
  • The timing of when positive cash flows begin, and;
  • The of risk business failure.

And, whilst operating any business involves risk, the risk of failure starting one is, in my opinion, greater than if you buy one.

That’s not to say you won’t uncover problems in the business you buy, as I know from experience, as I have the scars to prove it.

But how you deal with any of these challenges, will be down to your personal determination to succeed.

But then that’s ultimately the difference between being comfortable as an employee, vs being an entrepreneur.

But it’s also the difference between, not being in charge of your own ship, and ultimately being told what to do, vs being in change of your own ship, and no one telling you what to do.

There are always pros and cons of anything you do, but if you want the spoils of what owning a business brings, you have to take on board what you have to do to achieve that, and it’s really about cause and effect.

The cause, is what makes something happen (which in this case is whether you take a leap of faith, and start a business or buy an exiting one), and the effect, which is the outcome or consequence of that action (which in this case means taking on the responsibility, and the risk of starting a business or to buy one).

It’s like a chain reaction, where one event leads to another.

When you break it down, and when you understand the cause, which would mean handing in your notice to start a business or buy one, and the effect, will ultimately means more freedom and more money, if you are successful as a result of your actions.

You may not like the idea of taking over someone else’s company, and employees, so you may prefer to start a fresh.

But if you buy a business, it’s far easier to recruit someone to run the business for you, or even promote from within, if it has the profits to afford to do so. And the easiest way to achieve this, is to buy a large business.

But then you may ask, how do you do that, if you don’t have the money to buy a large business.

To find out how you do this, I explain in the following video:

To do what I suggest in the above video, you need to put in the graft, to find a suitable business, which is ideally a business with an owner who is motivated to sell, and one who has a flexible approach, when it comes to financing the deal.

And finally, you might also want to take on board one of the late Charlie Munger’s recommendations about the type of business to buy, which is to buy a simple business, that even an idiot could operate, and then employ a great CEO to operate it.

If you have any other questions on this topic about buying a business, or on any other aspect about the process involved in buying a business, please drop a comment below.

And always remember that no question is a stupid question, if you don’t know it, you don’t know it, and by having the answer to a question you have, might be all it takes to move to the very next step in your journey to buy a business.