Published February 27, 2007

The Advantages and Disadvantages of Buying a Business

There are many advantages and disadvantages in buying an established business. They are listed below:

Advantages

If you buy an existing business, you can begin operations immediately - and this saves time, energy and the need for research prior to initiating the business. In addition, you benefit from:

  • An existing customer base and contracts.
  • Existing vendors - they help to eliminate the need to identify new ones, enabling the business to operate from day one.
  • Existing staff and management, which help you to skip recruiting staff and training.
  • Knowledge Transfer - you can learn about running the business from the current owner, which helps you to gain an insight about their experiences and also use their expertise.
  • Existing premises - eliminates the need to search for new premises and the tension of lease negotiations.
  • Reputation - existing goodwill is associated with the name and location.
  • Financiers are always ready to lend money to an existing business with a trading record.

Disadvantages

Customers do not automatically give their trust when a new operator takes over the business, as they sometimes do not link the goodwill earned by the previous owner with the new owner. Some other disadvantages involved are:

  • Staff problems- Staff members leave their jobs when a new operator takes over the business, especially when they dislike the change, while some leave with staff entitlements, such as severance pay.
  • The business may have a bad image that is very difficult to change.
  • The cost of acquiring trust and goodwill may be very high.
  • You may have to honor a contract signed by the previous owner.
  • The lease agreement may be a problem due to the relationship of the landlord and the previous owner.
  • The premises may be very small and hamper future growth.

As there are always some advantages and disadvantages related to the purchase of a new business, you should prepare a checklist before closing a deal to avoid any problems. The checklist should include some basic points, such as:

  • The reason for the sale of the business.
  • A report on whether the business fits your needs, experience and financial capacity.
  • A checklist on the operations of the business, including sales, profit and loss and assets.
  • Research on current and potential competitors.
  • Check on the contracts for current and future deals with the customers.
  • A review of the draft agreement with a lawyer.

As a prospective business buyer you should analyze the current worth of the business and its future prospects.

Many firms offer help to guide people in buying any existing business. These guidelines help you to manage your business legally. The software is designed keeping the small business owners in mind and it is available at a very reasonable price.