Why buying a business might be better than starting from scratch.

Many people dream of being their own boss. They imagine themselves having that genius idea that is going to make them a millionaire, or just packing in the daily grind to do something they love every day. However, some people believe that the only way to do this is to start from scratch, when in reality, buying an existing business might be the ideal solution for you.

When you take the leap to become your own boss, the first thing you’ll need is the capital launch. According to my own internet research the average cost of a start-up is £93,800, making it difficult for many people to even begin. Granted, that tidy sum is accumulated over a period of start up and is not ‘day one’ capital required. Nevertheless, you are still going to need a significant sum for a good number of business sectors. If you don’t have the money in the bank to self-fund, your first thought might be to approach your bank to ask for a loan. Most start-up companies tend to be self-funded, as banks see it as a risk lending to a project that has no proven success. They are more likely to provide funding for an established business that they can see real historical turnover and profits for.

Another option may be a small business grant, but due to their limited availability, there are a number of hoops you are required to jump through during the application process, and you aren’t guaranteed success. You could also appeal to angel investors, however they are unlikely to get on board if you don’t have an idea that is completely revolutionary and sound. They want to be assured your business will be around long enough for them to see a return.

The fact is, more than 58% of start-ups fail within the first five years according to the office of national statistics. This could be, for example, because their money runs out, they’ve failed to build a reputation that secures them business or they can’t get the customers through the door. Again, money is a huge issue when maintaining a start-up company over the first few years, as it can take on average three years to start to see a return. This can be frustrating for the business owner, and also may not be viable for them in terms of their home life. After all, you still need somewhere to live and food on your table.

Buying a business can be a great alternative for someone with an entrepreneurial itch to scratch. It gives you the opportunity to be your own boss without many of the risks that come with a start-up business. The prospect of failure in the early days is significantly reduced because you’re missing out those shaky first years. You will be taking on a business with an existing customer base and reputation, which means you benefit from instant cash flow coming in.

Taking on an existing company is also a great opportunity for someone who wants to test the water with business ownership. You have all the freedom of owner management while inheriting the existing policies, procedures, and systems. Getting these in place is time consuming and costly, and can be off-putting to the new entrepreneur. Learning from tried and tested operations can be a great way of finding your feet while still having the autonomy you crave.

Many people considering buying a business have concerns that may put them off. Some are worried that the seller will take the customers with them, meaning the new owner has to find a new set themselves. Many small businesses, for example cafés, pubs and mechanics, have a certain geographic appeal to their customers. That is, the local people will go to their nearest pub, not walk miles to follow their previous landlord. Many sellers are also preparing for retirement, so they’ll have no need for any customers, new or existing. As a last resort, your legal representatives can ensure that protection is provided in the official legal documentation.

Getting the money to buy is also a concern I come across, however lenders often look more favourably on businesses with a proven track record. You can also look at what schemes are available in your local area, such as local authority grants and funding to help with renovations and even just money for taking on the business in the first place in some instances, particularly in areas requiring regeneration. It is also worth bearing in mind that purchasing an existing business is considerably less expensive than starting from scratch having regard to all the costs and risk elements. There are over 7,000 businesses advertised for sale for under the £93,800 average start up cost. This can not only make it more cost effective in the long run, but also more manageable to launch.

Buying a business is not without its problems, though. If you have no experience in the business area, you may find that you struggle to cope with the day-to-day managerial tasks. For example, can you run the accounts on your own? Do you know when the stock needs to be re-ordered? It may be helpful for you to spend some time with the previous owner before you take over, to learn from their experience and expertise; ask for an extended hand over for instance. This will also help make the transition easier for your customers, your staff and of course you. It will also increase the likelihood of the customers and staff staying with you.

There are also a number of pitfalls that you can face when you buy, for example being over-charged, or the seller not being completely honest with you about how profitable the business is, which can lead to disaster once you take over. This is where buying through a business broker can be particularly helpful, as they are able to offer impartial advice and guidance to make sure you don’t get any nasty surprises.

Taking your first step towards owning your own business can be nerve-wracking, but ultimately rewarding. Make sure you take the path that will be best for you long term and good luck with whatever route you take.

Pros and cons of buying and selling a Sole trader business.

abstract-ai-art-355948 (1)Although it is simpler to set up and arguably operate a business as a sole trader (from a paperwork perspective at least), the sole trader will be responsible for all debts and liabilities of the business, since the business and the individual are legally inseparable as far as assets and liabilities go. That means, if the business fails, the individual may be risking personal assets and their personal cash too! This is because the individual trades as, say Joes Café for instance and hence they are one in the same thing.

When it comes to buying, or selling a business that is operating as a sole trader, the process is relatively straight…

When it comes to buying, or selling a business that is operating as a sole trader, the process is relatively straight forward in most cases. A simple sale purchase agreement that can be drafted by a solicitor or even downloaded online (not recommended), will probably suffice to transfer the business.

Problems may arise with the likes of contractors, where a lease is in place or where the business requires some form of trade licence, as the licence, contracts and lease will need to be transferred from seller to buyer. Why is that an issue? Sometimes, the issuer of the licence, the customer or supplier who has a contract with the business or the landlord in the case of a lease; subject to any agreed specific terms, may refuse such a transfer. This could leave buyer and seller in a sticky position.

Whilst sole traders are required to keep a record of income and expenditure, there are no legal requirement for them to produce and maintain trading accounts…

So, the things to watch out for when buying or selling a business set up as a sole trader are things like the contracts with suppliers, any licences the business holds and customer contracts as appropriate. Make sure they can be assigned to the buyer or form a limited company moving everything across as necessary either before or after purchase (take advice if doing this). Buyers and Sellers should speak to professional advisors to ascertain the correct advice for their given situation.

Whilst sole traders are required to keep a record of income and expenditure, there are no legal requirement for them to produce and maintain trading accounts. If a sole trader is considering the sale of their business, this is highly recommended if not essential. From a buyer’s perspective, they will want to see a breakdown of income and expenditure and trading accounts are the best way to document this for buying and selling a business, supported with tax and VAT returns which will affirm some of the stated figures.

The sellers tax liability when selling as a sole trader is primarily Capital Gains at the current rate, less any personal allowance that may be in place at the time of sale. This can vary of course with changes in government budget and should be checked on the www.gov.uk website, or ask an accountant.

The final point is on staff. All employment is protected in the UK by TUPE (Transfer of Undertakings (Protection of Employment) Regulations 1981). In short, and without going in to the fine detail, employees are expected to transfer to the new owner, i.e. the buyer of the business on the same terms and conditions. Exceptions to this could be redundancy or the business trading insolvent. In those circumstances, it is important to be clear about the costs involved in making redundancies for example and whether the buyer is going to pay those costs or indeed whether the seller is expected to foot the bill through the price paid for the business.

The sellers tax liability when selling as a sole trader is primarily Capital Gains at the current rate…

This is by no means a conclusive guide as to the buying or selling of a business, but it outlines some of the key points.

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