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Buying a business? Things to consider before signing on the dotted line
Illustration by Frantz Arno Salvador
May 24, 2012
Many successful entrepreneurs are described as people who started their business from nothing and grew it to what it is now. Indeed, it takes time--normally several years as the entrepreneur struggles to survive trials--before a business can get truly established in the market. Still, this is not always the route to get into a business. There is a shorter way: buying an existing one.
One obvious advantage in buying an existing business is that someone else had already done the hard work of putting up the company for you. There is already a functioning organizational structure, and you only need to evaluate its operations and procedures carefully to make them even more efficient.
But buying a controlling interest in an existing company is not a surefire guarantee to success. There are pros and cons you need to consider before making the purchase.
To begin with, when a business you want to buy is stable and is generating good cash flow, the selling price will normally be high; you will most likely pay a premium to acquire it.
In contrast, you may find a better buying opportunity in a business with market potential that is losing financially due to mismanagement. This type of business may have some intangible assets such as a promising product or a good brand, but since it has been incurring fi nancial losses, you may be able to acquire it at a very good bargain. In this kind of transaction, however, you need to have a good strategic plan for turning the business around after acquiring it.
When you purchase a going concern, you enjoy instant market share and immediate access to an existing customer base. This is particularly strategic if you are already in a similar business; acquiring your competitor expands your market share immediately and enables you to cross-sell to a new customer list that you have not been serving previously. It could also happen that the business you acquired has a location that is strategic for your future expansion. This is particularly true if almost--if not all--of the other good locations in the area are already taken.
Then, for cost-cutting purposes, you will need to evaluate the personnel in an existing business. There will be some you will need to lay off due to redundancy or incompetence, but there will be others you will need to retain because they have the right skills and experience for the business. As the new boss of the company, of course, you will have the authority to promote or reassign the best people for particular positions.
The company you acquired is likely to already have the necessary licenses and contracts for doing the business, so you need not go through the application process all over again. The licenses can be in the form of copyrights or trademarks that you can expand or sell, and the contracts can be in the form of franchises or vendor agreements.
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