Should you buy a running business or start your own business from scratch? Which is the better option when it comes to establishing a business?
Some entrepreneurs have gone both routes. And from their experiences, not all aspiring business owners have struck gold when buying running businesses.
Many of them have ended up acquiring white elephants. “Buying a running business may look like an easier option than starting from scratch due to the existing exposure and customer base, but it is not as simple an investment as many would think,” says Robert Kiptanui, an entrepreneur and business coach.
He cautions that if a buyer is not keen enough, he or she could easily end up buying a collapsing business. “You must begin by asking yourself why the seller is selling the business, and especially if he is trying to cash in his investment and take off before it collapses.” Evanson Mwambia, a secondary school teacher and aspiring businessman attests to this.
Over the past few years, he has been trying his luck at owning a business by buying numerous running enterprises.
“All my attempts have ended up hitting the rock,” he says. In his first venture in 2011, Evanson sunk Sh. 300,000 in a taxi business that halted faster than the miles it covered. “I was convinced into buying a car that was already operating as a taxi unaware that it was broken. I had seen friends and acquaintances succeed in the taxi business, and given that this was a known business, I knew that I’d soon be smiling all the way to the bank.” Instead, he cursed all the way to the garage! “The car became a regular at the garage.”
Two months later, he sold the car at Sh. 250,000 making a loss of Sh. 50,000 and closed shop. A year and a half later, he took a Sh. 500,000 loan and bought a wholesale shop in Nakuru town. It didn’t last long. “I shut down after a year. The profits kept plummeting. The stock wasn’t moving as fast as it had done before and the number of customers who came to us dwindled sharply.”
Last year, Evanson acquired five running M-Pesa agencies in Nyahururu town. “I injected Sh. 30,000 float capital in each one of them.” However, they have not been doing well and by February this year, he had closed two of them. “The market has become too saturated to make anything meaningful. The commission I get is too small due to the low number of customers,” he says.
With all the failure he is encountering, Evanson confides that he is beginning to think that he was not cut out to own a business.
But according to Robert, Evanson has been setting himself for failure right before buying the businesses. “It would appear that he has not been getting the true picture of the businesses he acquires which in is the beginning of failure in the world of business,” says Robert.
Apparently, many buyers of running businesses like Evanson get stuck with loss-incurring white elephants due to their failure to interrogate the true value, existing competition, and future potential of the business at hand. “A seller will never tell you that you are flushing your money down the drain by buying his business,” says Robert. “He will only tell you that you are in for mega profits and sustained growth but these should not be a determining factor.”
Granted, potentially profitable running businesses that are on sale have become a common feature in local advertising platforms. Nonetheless, the question has remained on how buyers are to determine the right enterprise to buy and whether it will milk their pockets dry or shower them with profits. For instance, we came across an advertisement calling on potential buyers to buy a beauty shop located in Kiambu town.
“The business is approximately 2,500 square feet and comprises of a salon, a barber shop, massage palours and an M-Pesa Agency. The asking price is Sh. 3.4 million while monthly rent for the building hosting the business is Sh. 70,000 per month,” said the advertisement. How should a buyer looking to acquire this business go about it?
According to Robert, the first step in buying a running business begins by evaluating the enterprises on offer and determining which one you are interested in. “If you are interested in this salon, you should look at its operational history and explore in detail how it has been running,” he says.
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Essentially, you will need to determine if the fair value of the business if you have settled on buying it.
“You must ask yourself if the business is worth anywhere near Sh. 3 million and whether the location of the businesses premises is worth pouring a rent of Sh. 70,000. If not then take your money and run!”
Some of the methods you can use to determine the fair value of a running business will include cash flow, asset value, and capitalized earning value methods. “Cash flow will allow you to determine how much of a business loan your business will be able to support should you decide to take one, while the capitalized earning approach will look at the returns you’re likely to make,” says Robert.
In addition, you may want to use the assets valuation method to determine the value of existing tangible assets or the excess earnings method to separate earnings on assets from other earnings. Munyao adds that before you buy a business, you should always make sure that you have examined the enterprise’s balance sheet.
“All businesses should have a balance sheet containing their financial accounting. This is what will help you to determine where the business stands financially.” This will include the owner’s equity, assets, and liabilities. In addition, you must see and verified the tax return documents of the business for a period of time.
Apart from having the acquisition capital, always ensure that you have money set aside to fund other costs such as operational costs, stocking costs, rebranding, marketing or advertisement costs. You should always take care to observe your competitors and how they are likely to affect your business.
“I have managed to succeed because I maintained good customer relations with customers who came to the salon because of my former employer,” says Munyao. “Never lose a customer when carrying out restructuring.” Similarly, be careful to establish your own uniqueness and introduce new better goods and services.
According to Robert, potential buyers like Evanson may consider getting the services of a valuation expert to determine the true worth and viability of any business they are interested in.
“You will do well to also engage a lawyer when drafting the sale agreement to avoid any future confrontations,” he advises. Normally, buying a running business will involve the purchase of the operating assets only. However, in some cases, a buyer may opt to increase and, or acquire a business through purchasing of shares if it is incorporated.
