8 reasons why it’s better to buy an existing business than to start from scratch
Want to start a business and couldn’t make choice whether to buy an existing one or start from scratch? Whatever you decide, there always will be number of risks and barriers. Yet, I’ll try to explain with reasons and arguments, why it’s always better to buy an existing, functioning business.If you ask businessmen, majority of them will advise to buy an existing business. The reason is that in this case, you will be able to make your dream come true more easily, in a short time and with fewer risks.
There’s no doubt that you can start a small business with small capital, but how long it takes to start operating, gain success and when will you start to make desired amount of output?! You have to consider that risk of failure is higher in new scratch, than in developing existing business.
Let’s discuss the case: you have enough resources for starting new scratch as well as for buying existing business. You have found out that business, you’d like to get involved in, is on sale. What would you do? Please, check out 8 reasons, why you should choose buying an existing one:
- Existing system: One of the main difficulties in starting new business is building a system that can lead the company to failure and this failure can be too expensive. Alike problems aren’t met when you buy a functional business. In this case, little development activities can be made that does not need many resources.
- Existing employees: Another difficulty, when starting a new scratch, is choosing employees, their training and time spent to make new employees make aware of every aspect of your business. These resources can be saved when buying existing business.
- Reputation: another advantage of continuing existing business is reputation. When you buy a functional business, you are sure that you already have consumers and you brand is already recognized by people.
- Facts VS. Theories: Buying an existing business, you already have FACTS like: annual revenue, annual net profit margin, statistics etc. as much fact you have, as less theory you need and less decisions are made based on forecasts and assumptions.
- Existing consumers: buying a business means buying consumers. This means that you do not have to dream for months when will at least one consumer appear.
- Better opportunities for raising funds from external sources: banks and financial institutions are more “friendly” to those businesses who already have at least two years of financial data, than to those who have just begun and there is no at least one annual statement.
- The owner’s experience: if you buy an existing business, you’ll also get the experience. Business seller is considered to be your future “teacher”. He guides the business specifics, what it needs, what you should pay more attention to and what less, etc. While, when you start a new business, you learn everything without help and make many mistakes.
- Less Risk: Due to the above reasons, the purchase of an existing business is less risky than starting a new one. So good luck in buying a functional business!!!
Mistakes to Avoid When Selling Your Business
Most sellers don’t expect the exit from their company to be easy, but many are surprised by how difficult it can be to sell their business for a good price in a reasonable time frame, especially in the current economic environment. There are literally dozens of challenges to overcome, but here are those that could have the most significant impact on your sales transaction:
Mistake N1: Not planning ahead / Insufficient Preparation
Lack of preparation is by far the most common mistake that small-business owners make. Just like you would spruce up your house before hanging a “For Sale” sign in the front yard, it’s important to address several key aspects of your company before listing it for the transaction. Financial documentation, sustainable profitability, staffing problems and other concerns will not only impact salability, but also the price your business will command in the marketplace.
Mistake N2: Not finding the right person to represent your business
Finding the right broker and/or consultant to help you sell your business is crucial to your success. You’re an expert at running your company-not selling it. Would it be nice to save the roughly 10 percent brokerage fee? Sure, but in most cases brokers are capable of adding at least 10-12 percent to the sales price. Even though there are certain circumstances in which a for-sale -by-owner approach makes sense, most owners are better off hiring a professional to handle important tasks like preparation, showing the business to potential buyers, marketing and negotiation.
Mistake N3: Incorrect / unrealistic pricing
Inexperienced sellers have a tendency to set a price before they’ve calculated value. The reason this is such a big mistake is that price is the single most important factor in determining how long a business stays on the market. Consider peculiarities of your industry, similar companies, the economy and your marketplace. Overestimating required transaction amount of your sale can lead to buyers not taking you seriously. If you don’t know how to value your business seek advice from a broker. Share owners who have taken the time to conduct a thoughtful valuation before assigning an asking price are more in touch with marketplace prices and better positioned to defend that price and to get the benefit of a faster sale. Another mistake is to price the business too low. So avoid problems and get an objective third-party valuation.
Mistake N4: Failure to Address Transition Issues
Many owners are so focused on selling their business that they completely neglect the transition process that will occur after closing. Some buyers will insist on the seller remaining on for a few months to assist with this transition or training, while others prefer a clean break. Either way is fine – as long as the parties have discussed and reached a mutually acceptable arrangement during negotiations.
Mistake N5: Lack of confidentiality during the sales process
Once word gets out that the business is being sold, employees may leave, vendors may hold back on deals, and customers may head to your competitors. The value of your company can drop quickly if you do not maintain confidentiality.
Mistake N6: Right timing
The best time to sell your business is when your performance is at or near its peak and market valuation is highest. Many people wait to decline and enter negotiations at the bottom when they have financial or other kind problems. That’s the exact opposite of what has to be done.
Why invest in emerging markets?
According to World Economic Outlook (WEO) of International Monetary Fund (IMF) link
the main criteria used to classify the world into advanced economies and emerging market and developing economies are (1) per capita income level, (2) export diversification – so oil exporters that have high per capita GDP would not make the advanced classification because around 70% of its exports are oil, and (3) degree of integration into the global financial system. Note, however, that these are not the only factors considered in deciding the classification.
Emerging markets continue to attract investors from all over the world. Several reasons exist:
Geographic diversification helps to reduce portfolio volatility and stabilize cash flow. Global markets don’t necessarily rise and fall together. Examples can be:
a) Asian currency crisis that started in Thailand with the financial collapse of the Thai baht
after the Thai government was forced to float
the baht due to lack of foreign currency to support its fixed exchange rate, cutting its peg
to the US$.
b) Financial crises of 2008 that most impacted North American and European markets.
- High growth
Emerging and developing economies are those from where the most of the growth in the world is coming from. That’s where the majority of the stock markets appreciation is likely to be. They are expected to increase two to three times faster than developed nations like the US, according to International Monetary Fund estimates.
The chart above provides IMF information as at August 2014 on percent change of Gross Domestic Product at constant prices. Year 2019 forecast for emerging markets and developing economies is 5.345% vs 1.905% for European Union that is 2.8 times higher measure.
Strong potential future performance can be attributable to:
a) Young population that gives good employment opportunities
b) Relatively low debt burden for government and corporations and thus healthy balance sheets
c) High potential for productivity growth. It has greatly lagged to that of mature economies but better infrastructure and technological advances in developing world can significantly boost productivity
Business Valuation Process
Valuation process contains several steps:
One of the steps of the part 1 is to understand an industry structure and Porter’s five forces can be helpful:
- Business summary: it covers macro and micro analysis, review of financial statements
- Pro-forma financial statements: includes forecasts that are inputs for valuation models
- Business valuation: converting collected data into valuation by using appropriate models
To forecast a future performance either top-down or bottom-up approach may be used. In the first case starting point is a macro and industry predictions that are followed by a company and individual asset projections. In the second case separate store budgets can be accumulated into a whole business forecast.
Valuation models can be divided into two broad – absolute and relative categories.
- Rivalry in the industry
- Threat of new entrants
- Threat of substitutes
- Power of suppliers
- Power of buyers
The most important type of absolute valuation models are present value (PV) or discounted cash flow (DCF) models:
- Absolute valuation models
Another category is asset based valuation that values a company on the basis of the market value of assets it controls. It can be appropriate for some particular industries or may formulate a bottom line for going concern entities.
- Dividend discount models
- Free cash flow to equity models
- Free cash flow to firm models
- Residual income models
Main idea is that similar assets that are called comparables have to trade at similar prices. It is called the law of one price. The following ratios are the most familiar tools used for valuation:
- Relative valuation models
During the valuation process several available approaches are used and the final result is a weighted average of used methods.
- Price multiples
- Price to earnings (P/E)
- Price to sales (P/S)
- Price to cash flow (P/CF)
- Price to book value (P/BV)
- Enterprise value multiples
- Enterprise value to EBITDA (EV/EBITDA)
- Enterprise value to sales (EV/S)