[Column] Bob Koigi: The tough balancing act in buying an existing business
A good friend of mine working in a local bank in a plum marketing position decided to call it quits after the thrill of working in a well polished office signing documents and swinging on expensive chairs all day fizzled.
So in his mid-thirties, he set out on an entrepreneurial path. He wanted his own business. But he struggled with just what idea he would execute from scratch and reap from it in the shortest time possible; business sense you know. After all every business idea seems to have been taken up by an entrepreneur somewhere.
So instead of starting one he set out to search an existing one. And lucky for him he found a rather promising furniture business specializing in high end market in one of the Kenya’s high end markets.
He has been in the trade now for the last six months and he says so far so good. Interesting as it may sound, buying an existing business is a fast rising phenomenon in Kenya and Africaespecially by entrepreneurs who lack ideas or time to create a new business. The reasoning here is that they will inherit a working infrastructure complete with resources they would otherwise have to secure on their own, such as equipment and employees.
Entrepreneurship is a risky business. One way to reduce your risk is to buy an existing business that's already demonstrated an ability to successfully operate, hopefully at a profit. That confidence does come at a price, though, as you'll generally spend far more to buy a business than to start one from scratch. If you've got the funds, though, it's an excellent option.
Again buying an existing business may allow you to avoid the risks and uncertainties of start up and may also save you a great deal of effort. Since the organizational structures are already in place and the employees trained, the business continues to operate and you have only to ensure a proper use of resources and control of operations and marketing.
Generally you don't have to wait as long for returns on your investment because you theoretically have market share that you can build and don't have the difficult task of building a brand new customer base. Although the initial investment might be higher, it is easier to borrow capital since the business serves as its own security and has an existing track record. Buying an existing business is advantageous since a good business history can increase the likelihood of a successful operation and ensure that finance is easier to obtain.
The flipside however can be in overestimating the goodwill figure and a poor public image inherited from the previous owner. Again Purchasing cost may be much higher than the cost of starting a new business because of the initial business concept, customer base, brand and other fundamental work that has already been done. Also, be aware of hidden problems associated with the business like debts the business is owed that you may not be able to collect.
When considering buying an existing business, call to mind this question. Why do I want to buy this business? Do I know anything about this particular type of business? Do I have enough business experience? Do I know the details about the business that I am proposing to buy? Why does the owner want to sell? Am I buying the current owners broken dream? Are there hidden problems? Is there really a future for me in this business and location? Do I know the area well enough to make an intelligent decision? When you find the right opportunity, examine it methodically, take your time and verify the information you are given before you commit yourself.
Don't fall in love with the business before you do your homework, buy a business within an industry you know well, with a product or service you are comfortable selling. Buy based on the return on investment, not the price and don't use all of your cash for the purchase because you will risk cash flow problems.
Investigate current industry trends like the economic and legal indicators before you buy, make a surprise visit to the business, talk to employees, customers and suppliers, do anything that will enable you to gain a good idea of the business' overall situation, including the reason it is for sale, the extent of its human, physical and financial resources, particular problems, licensing and government regulations affecting the business, trends in the industry and competitive developments.
With any business purchase, you should have a buy/sell agreement signed by both parties, which spells out the demands and obligations of each, as well as the terms of the deal. You should also be checking with your accountant on the different tax implications, if purchasing the assets or shares of an existing corporation.
If you are buying an existing business, you will want to protect yourself from any prior breach of contract or law, and have your lawyer review any contracts still in effect after your buy-in.
There are a number of other legal issues, you must ensure the business complies with licensing, registrations, consents, notices, environmental concerns, and employee issues. Other forms of contracts that require the services of a lawyer include the preparation of a partnership or shareholder agreement, a lease agreement, employment contract, mortgage, purchase agreement, or possibly a franchise agreement. Above all, make sure you contact a lawyer before you sign anything.
Multiple award winning Kenyan journalist Bob Koigi is the Chief Editor East Africa at Africa Business Communities