For some people, the thrill of starting their own business and of making something from nothing makes all of the sacrifices of time, energy and money well worth it. However, other people like Larry Polhill prefer to acquire businesses that are already established with proven revenue streams and existing customers. If you are considering the purchase of an existing business, here are some things to keep in mind.
Contracts and Agreements
There is no question that it is a good thing to have contracts or sales orders in place as you take over – this can take some of the pressure off a new business owner while the transition takes place. However, be sure that you understand how those contracts or orders bind you, and for how long. Especially if you are planning to make changes to products or services, you may find that existing commitments are more of a liability than an asset. Be sure to think beyond customer contracts – you may find that you are locked into contracts to have equipment supplied or replaced, to cleaning or rental contracts, to run advertising campaigns, or to keep domain names. None of these commitments are necessarily problematic, but you need to be sure that you understand if or how they limit your choices.
One of the most important things to consider when you take over an existing business is the existing staff – after all, these are the people who know how things get done and who hold the expertise and institutional knowledge about the business. Until you have moved up the learning curve for your new business, it is very likely that your staff will know more about the business than you. All of this makes staff retention after the purchase a key priority. However, it is something that cannot be assumed, and it is quite common for key personnel to leave after a business has been sold. Make sure that you have a sense of what protections are in place to safeguard your investment – you can’t require people to stay as a condition of the purchase, but you can do your due diligence to get a sense of the likelihood that staff will stay.
If you are buying a business that has an established customer base, that is certainly a good thing. To some degree, you may also be inheriting existing contracts which can help keep the money flowing during the first few months. However, it is a good idea to make sure that you understand the nature of the relationships between the business and the customers. For example, if customers are loyal to the previous owner, you may not be able to count on them to stay with your business after the transfer of ownership. Or, if there is a current of underlying customer dissatisfaction, you may find that you get punished by angry customers who don’t renew contracts as a result. Do you best to make sure that your inherited customers will be happy.
Whether you decide to start your own business from the ground up or take over an existing business, there will be advantages and disadvantages. Be sure to do your research so that you can make the right decision for you.