Many entrepreneurs look to start their own businesses and go through the journey of business planning, securing funding and making that first sale. However, for many other entrepreneurs, the desire to start a business from scratch does not exist; they would rather buy an existing business and grow it.
In order to buy a legitimate business, you need to know where to look and who to talk to. There are various platforms and organisations that can help you check if the business you are buying is compliant.
In this article, we look at the advantages and disadvantages of buying an existing business, and which platforms can help you verify your potential purchase.
What Does Buying a Business Mean?
Buying a business means acquiring an existing, operational company, including its assets, staff, customer base, and brand reputation, rather than starting from scratch. It offers immediate cash flow and established systems, reducing the risks of a new startup. This process involves various legal, financial, and due diligence steps.
Pros and Cons of Buying a Business
These are some of the advantages and disadvantages.
Pros
- Business has established systems, processes and staff in place.
- The business has an established market and brand reputation.
- Reliable income may already be in place.
- The business will have an existing loyal customer base.
- Purchasing a larger business will give access to capital.
Cons
- Purchasing a business may require you to take on any debt and investment costs.
- There may be a need for increased working capital to ensure cash flow.
- Renegotiating existing contracts and client relationships can be difficult.
- Purchasing a business can come with high upfront costs such as purchase price, legal fees and financing costs.
- Risk of inheriting poor staff morale, outdated equipment or legal liabilities.
Before taking out money, it’s important to do your due diligence. This means identifying hidden risks such as outstanding liabilities or poor equipment condition. Also, you need to evaluate why the owner is selling and if the business can operate independently of the owner’s expertise.
Navigating the Buying Process
When buying a business, there are various legal and financial processes and factors you need to be aware of. These include:
- Signed business sale agreement: This document is very important in the process. It should have clear terms and obligations outlined for you and the seller.
- Lease agreement: If you are purchasing a business that has a property or will need one after you buy it, the terms of the business lease are very important. Most landlords of business properties prefer to deal with a company structure rather than an individual.
- Bank Account: You will need to open a business bank account. This will give your bank the leverage to ensure that you meet all business account requirements, and you can negotiate the best business terms on your account.
- Ownership: Legally, most bankers, funders and landlords prefer doing business with a company rather than a person, although your personal suretyship may be required for some aspects of your business funding and ownership. Ensure that the registration, ownership terms and shareholding of the business are clear, especially if the new business venture requires a shareholding partnership or complex ownership structure.
- Employees: Any new business owner who purchases a business with existing staff will need to continue to employ them without interruption, as stipulated by South African labour law.
- VAT registration: Buying a business means that you must be registered as a VAT vendor. If you do not comply, the South African Revenue Service (SARS) will levy VAT charges for which you are personally responsible. There are numerous documents and legal requirements for registering for VAT, which a broker or your bank can help you with.
How to Conduct Due Diligence
Due diligence is the most important part of buying a business. Use the following as your due diligence checklist.
Financial Due Diligence
- Review 3 to 5 years of the business’s tax returns and financial statements, cash flow records and sales figures, profit and loss statements, and assets.
- Confirm the business’s tax compliance and liabilities.
- Check for outstanding debts and liabilities.
- Analyse the business cash flow to get an accurate picture of its growth potential.
- Investigate revenue trends and projections for the sector/industry.
Legal Due Diligence
- Review all contracts and licences, including supply, customer, operational and employee contracts, leases and any other agreements.
- Check for intellectual property rights to gauge value and risks associated with patents, trademarks, copyrights or trade secrets.
- Check for business name registration, domain registration and trademarks or brands.
- Investigate any past or pending litigation, lawsuits or any other legal issues facing the business.
Operational Due Diligence
- Review business plans and strategy documents.
- Evaluate the business’s operations and processes, including management structures, staffing, and human resources.
- Assess customer and supplier relationships and contracts.
- Review business assets and equipment, considering their age, maintenance schedules, and anything needing repair.
- Examine the business technology infrastructure, data security, and software systems to make sure they’re up to date, secure, and scalable.
Market Position and Competitive Analysis
- Review market strategy plans and performance reports.
- Check out the business’s online presence, including search rankings, existing ad buys, and other marketing campaigns.
- Perform a competitor analysis to understand the business’s challenges and opportunities, and the strength of the business in its market.
- Evaluate how the business reaches its customer base and customer loyalty
- Review customer records, feedback, and reviews.
Regulatory and Compliance
- Review regulatory and compliance obligations specific to the industry
- Check for issues related to licences, permits, premises, or government regulations
- Review tax compliance status, including tax records, liabilities, and compliance with local and international tax laws (depending on industry)
- Review compliance with workplace conditions, agreements, and employee entitlements
- Investigate whether the business follows environmental regulations, and check its potential liabilities in areas like waste management, pollution, and hazardous materials
Platforms for Buying Businesses in South Africa
- Top platforms for buying a business in South Africa include dedicated marketplaces which offer verified listings across various industries.
- BusinessesForSale.com – Often considered a leading platform, offering a massive, diverse range of businesses, franchises, and investment opportunities.
- Business For Sale – A popular, reliable site for finding diverse business opportunities with active seller listings.
- Renwick Business – A well-established business brokerage firm that lists a wide variety of businesses for sale across South Africa.
- Flippin’ Business – Focuses on verified listings and provides a user-friendly experience for searching and comparing business opportunities.
Many entrepreneurs look to start their own businesses and go through the journey of business planning, securing funding and making that first sale. However, for… Read More
