There is no doubt that virtually every industry has experienced significant changes and shifts throughout the COVID-19 pandemic.
Whilst the economy is steadily recovering from its impact, it could seem like a risky time to buy a business. However, some industries, such as engineering, manufacturing and ecommerce, have seen a rise in demand during the pandemic, providing future opportunities for entrepreneurs.
John Hatt, Managing Director 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 in order 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 come with significant benefits. If you choose the right business, it will come with an existing customer base, a strong brand, and a steady 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 as to how the business adapted during the pandemic and whether it has financial resilience to withstand the post-COVID landscape.
Forecasts are more predictable when the business 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 a lot easier. You will be able to build on what the previous owner did. Although you can rebrand and change the business, you will need to consider if this will alienate existing customers or be damaging to the brand you have bought.
What needs to be considered before buying?
It is extremely important that any prospective buyer does proper due diligence before buying any business. This process should be initiated at the earliest opportunity after your offer has been accepted and before exchange of contracts or completion of a purchase. It will also establish the business’ 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 business.
There are some areas, however, that will require greater attention in the current climate. These include:
• Employment issues: Review the steps the seller has taken to release its duty to protect the health and safety of its workforce in relationship to the pandemic.
• Supply chains: Assess whether suppliers in the supply chain can still reach their agreements and be mindful how the seller has adapted to any supply chain disruption.
• Financial assistance: Obtain details of the seller’s participation in any financial schemes or other government measures to assist businesses during the pandemic and the circumstances in which the relevant support is (or may become) repayable.
• Insurance: Reflect on the extent to which the seller is covered for losses arising from a business slowdown or stoppage due to the COVID-19 outbreak and any similar events that may occur in the future.
• Material contracts: Evaluate whether the seller can still complete its material contracts and what the possible consequences of non-performance are.
The COVID-19 pandemic has been a huge challenge for many sectors and the continuing uncertainty could be particularly damaging for new businesses. Investing in an existing business that has a stable income could be a better opinion at this time, but you need to ensure that any major impact is reflected in the business’ valuation and/or is echoed in the warranties and indemnities in the purchase agreement. This will essentially give the buyer a right to claim a portion of the purchase price back if any of the foreseen problems arise.
Deciding what business to buy will depend on your hopes for the business, whether there are any suitable businesses for sale, and which option appeals more for you. If you want to run a business without struggling through the difficult start-up years, it’s best to buy an existing business.
Something which buyers often overlook is whether they should get the business valued by an independent broker, and the answer is always a big YES! Take advantage of all advice (you may have to pay but it can be money well spent) that is available… always buy with the head and not with the heart!