When it comes to starting a business venture, many people think that an out-of-the-box, unique idea is needed in order to develop and build a company. However, this notion is progressively changing as more and more budding entrepreneurial-minded individuals are looking to seasoned entrepreneurs for their starting block in the form of an offer-to-purchase.
Christo Botes, executive director at Business Partners Limited, says that developing a start-up business or buying a franchise isn’t the only path to becoming a successful business owner, and that the route of purchasing an already existing business is growing in popularity.
Botes says that the country’s high start-up failure rate is contributing to the shift from start-up ventures to acquisitions. According to the 2016-2017 Global Entrepreneurship Monitor report, South Africa’s established business rate – the percentage of the adult population that are owners or managers of businesses that have been in operation for more than 42 months – is only 2.5%, and one of the lowest in the world. “This low percentage of established businesses highlights the difficultly many entrepreneurs face when starting and even sustaining a business. Research shows that the first 1,000 days of a new business is critical, and that many new business owners tend to fail within the first three years of operation.”
Opting to purchase an existing business instead of starting a business from scratch is a safer and more effective way to becoming a business owner as it is naturally associated with less risk, says Botes. “While the owner of a start-up business would have to build up a brand and customer base, hire new staff and establish cash flow, an existing business offers immediate cash flow, already trained staff with implemented systems and infrastructure, as well as brand awareness in the marketplace.”
He adds that opting to go this route isn’t only positive for a budding entrepreneur, but also for the business itself. “The personal flair, enthusiasm and wave of fresh ideas from a new business owner could give the business a new lease on life.”
In the current economic landscape, as many small and medium enterprises (SMEs) are still recovering from a tough 2016, Botes says that this is an optimal time to research viable businesses in the marketplace who would consider selling. As the Baby Boomer generation – those born between 1946 and 1964 – have been moving into retirement since 2011, this too offers numerous entrepreneurial opportunities as retirees look to sell their business. Statistics by California Association of Business Brokers show that in the next two decades approximately 12 million businesses will be sold by Baby Boomers, to the value of US$10tn worth of assets. While this figure is not readily available in South Africa, it can be estimated at hundreds of millions.
Botes warns, though, that taking ownership of an existing company doesn’t mean avoiding all risks, or hard work. “There are still risks that apply and it is imperative for prospective buyers to conduct thorough research of the company they are considering purchasing before they make a decision. Research should include why the business is being sold, as well as how competitors are faring in the industry.”
He adds that a well thought out business plan should also be in place. “As part of the planned acquisition, plans should be in place to revamp the business by introducing a new product line or two, or repackaging of the existing product line, as without this, the potential growth could be limited. By incorporating this in the sale, the seasoned existing entrepreneur can provide his/her input as they are more likely to know the tricks of the trade.”
Another important step to include when buying an established business is due diligence. “All records must be reviewed and buyers should take heed of any pending litigation suits, investigate tax audits and insurance disputes, as well as the financial history and intellectual property of the business. While often a daunting and complex process, this is a necessary step to avoid any headaches post purchase so it is advisable to seek the guidance from a lawyer or accountant who can assist with this process.”
Botes concludes: “Buying an established business is a great option for those wanting to begin their entrepreneurial journey, however, buyers need to be aware that the process can be lengthy, and if not done correctly, may be the downfall of a once successful company.”