Starting up needn't be from scratch – you can buy an existing business

Starting up needn't be from scratch – you can buy an existing business

Some people may not want to start up their own enterprise, so acquiring someone else’s SME can seem beneficial – but there are drawbacks

Alison Coleman

Fri 3 May 2013 10.59 BST

 Returning loyal customers and engaged staff are among the benefits of buying an existing business. Photograph:

Starting a business from scratch is a major undertaking with huge challenges. There is funding to find, customers to attract, a reputation to establish, and then a lengthy wait for the financial rewards.

Buying an existing business is becoming an increasingly popular option for people who don’t want to start from scratch. The business is likely to have an established market presence and revenue stream, which represents a head start but by no means makes it an easy option.

The cost of buying an existing business will often be higher as this covers what is known as “goodwill”: the existing and return customers that the previous owners have built up. Once purchased, this goodwill requires specific care and attention from the new owner to avoid the value of the goodwill being lost.

And, in calculating that value, the important thing to bear in mind is that historical performance is no indication of future performance, says the executive director of P&MM Events and Communications, Nigel Cooper, who has led a number of business acquisitions.

He said: “The concept of due diligence has changed. Previously it was about looking back, now it must be forward-looking, especially in the current economic era. A prospective buyer needs to look at what is confirmed and in the current order book, rather than the financials from the previous year. In reality, the goodwill is the future of the order book, and what is happening today is key.”

Four years ago, when former mortgage broker Richard Brooks was looking for something else to do, he decided that something was running a business. He was particularly interested in online retail, and, while he had considered starting from scratch, he felt he didn’t know enough about the sector.

“Buying an established company with knowledgeable staff and a turnover seemed a better option, and I bought, an online computer accessories retailer,” he said.

A cash buyer, he carried out his own business valuation looking at the level of repeat business (around a third) to work out the profit.

“I was pretty sure that with a seamless transition – the supply chain and the processing systems were already in place – 99% of those customers would continue to buy from a new owner, and they did,” he explained.

Another key piece of information a buyer needs is the reason why the business is being sold. In the case of, its three founders had decided to go their separate ways.

Brooks added: “I negotiated with them and finally agreed a price, a lawyer drew up the contract, and the sale was complete. I paid a lot for the goodwill, but trying to start up a venture like that from scratch would have cost me a lot more.”

Where businesses are offering a face-to-face customer service, one built on trust, for example, accountants, hairdressers, and dentists, a change of ownership has to be handled very carefully to retain that trust, maintain the customer relationship, and preserve the value of the goodwill.

When dentist David Hickey bought his practice, Southport Road Dental in Chorley, Lancashire three years ago, goodwill accounted for around half of the purchase price.

He said: “People are naturally wary of change. I had plans for what I wanted to do with the practice, but for the first 12 months I didn’t really change anything. It was important to let the patients grow accustomed to the change of ownership while maintaining their comfort zone.”

Three years on, with the help of an effective marketing strategy, what was a very traditional surgery has been transformed into a modern dental practice focused on offering pain-free treatments to win over anxious and nervous patients, extended hours for time-strapped patients, and with a growing customer base.

Hickey added: “It’s all about good communication and keeping people informed about what’s happening here and engaged with what we are doing, through the website and a monthly newsletter, and we are using more technology – email and texts – to do it. Ours is a repeat business that grows by referral, and that can only happen when you earn people’s trust.”

Winning the trust of employees who come as part of the business package presents a very different challenge, as Greg MacDonald discovered when he bought Goodfish, a manufacturer of plastic components for the automotive industry in 2010.

The business, which employed 25 people, had been all but destroyed in a fire and had seen little trade in the ensuing nine months while a major refurbishment was under way.

MacDonald, who had previously worked as an investment banker and had experience in the area of mergers and acquisitions, aspired to make a purchase of his own.

He said: “I knew how to value a business, and I knew how to turn a struggling business around, but one of the biggest challenges of taking on a going concern was managing the employees who worked there. To them I was an outsider. They had already experienced some pretty turbulent times, and they felt threatened, but winning their trust was crucial, and I did it by just being very open with them about my plans for the business; open, transparent and believable, because you can’t hoodwink your employees. We are now in the early stages of growth, and, when the time is right, I will invite them to become co-shareholders of the company.”

This is a significant point that prospective buyers often fail to recognise, adds Nigel Cooper.

“The key stakeholders in the organisation you are buying are not the shareholders, but the relationship holders,” he says. “It doesn’t matter who owns the business, it is about the people working in the business. When you acquire staff, you acquire the key people who own the relationships that will play a hand in the future success of the organisation.”

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