There is no doubt that virtually every industry has experienced significant change and shift through the COVID-19 pandemic.
While the economy is steadily recovering from its impact, buying a business can seem like a risky time. However, some industries, such as engineering, manufacturing and e-commerce, have seen an increase in demand during the pandemic, providing future opportunities for entrepreneurs.
John Hatt, CEO and experienced business broker at Business Partnership, gives his advice on the benefits of buying an existing business and why now is a good time to buy to profit in a post-pandemic world.
Benefits of buying an existing business
Buying an existing business can give you the same independence as starting a business, but it will also bring significant benefits. If you choose the right company, it will come with an existing customer base, a strong brand and a stable or growing income, as well as a goodwill attached to the company. This is especially important in the current climate, as you will have an insight into how the company adapted during the pandemic and whether it has the economic resilience to withstand the post-COVID landscape.
Forecasts are more predictable after the company has been running for a while. You will have a better idea of your future income and cash flow, which can make planning and applying for financing much easier. You will be able to build on what the previous owner did. Although you can rebrand and change the business, consider whether this will alienate existing customers or be detrimental to the brand you have purchased.
What to consider before buying?
It is extremely important that every potential buyer does proper due diligence before buying a business. This process should begin as early as possible after your offer has been accepted and before exchanging contracts or completing a purchase. It will also establish the company’s assets and liabilities and evaluate its commercial potential, as well as enable you to assess both the current and future impact of the pandemic on the company.
However, there are some areas that will require more attention in the current climate. These include:
• Employment Issues: Review the steps the salesperson has taken to release his duty to protect the health and safety of his workforce in the event of a pandemic.
Supply Chains: Assess whether suppliers in the supply chain can still reach their agreements, and pay attention to how the seller has adapted to any supply chain disruption.
• Financial assistance: Obtain details of the seller’s participation in any financial arrangements or other government measures to assist companies during the pandemic and the circumstances in which the relevant support has been (or may be) repaid.
• Insurance: Reflect on the extent to which the seller is covered for losses due to a braking or downtime due to the COVID-19 outbreak and any similar incidents that may occur in the future.
Significant contracts: Assess whether the seller can still execute his significant contracts and what the possible consequences of default are.
The COVID-19 pandemic has been a major challenge for many sectors, and the continuing uncertainty can be particularly damaging to new businesses. Investing in an existing company that has a stable income might be a better idea at the moment, but you need to make sure that any major impact is reflected in the company’s valuation and / or reflected in the guarantees and indemnities in the purchase agreement. This will essentially entitle the buyer to reclaim part of the purchase price if any of the anticipated problems arise.
The decision of which company you want to buy depends on your expectations of the company, whether there are any suitable companies for sale, and which option appeals most to you. If you want to run a business without struggling through the difficult start-up years, it is best to buy an existing business.
Something that buyers often overlook is whether they should have the business rated by an independent broker, and the answer is always a resounding YES! Take advantage of all the advice (you may have to pay, but it may be money well spent) that is available … always buy with your head and not with your heart!