Buying a business – An introduction

Buying an existing business is a good way to become a business owner, by doing this you avoid many of the potential pitfalls of starting a business. Most businesses which have been established for a reasonable period of time will have ironed out any major issues and will have learned lessons early on which you can benefit from. The downside to buying a business as opposed to starting one is that you will be paying the seller for the goodwill of the business.  

Payment for goodwill is viewed very differently from person to person. For some the benefit of going into an established business with sales history and forecasts, and cash flow, makes the payment for goodwill a good deal. For experienced operators in their chosen field, paying for goodwill is sometimes seen as a waste of money. If these operators have the experience and knowledge to start a business this is usually their chosen route. Having said that, it does sometimes make good business sense for experienced operators to pay for goodwill, especially if they look at buying out their competitors.  

If you choose to buy a business and pay for goodwill it is crucial to make sure that you do not pay too much. There is much debate about how goodwill should be calculated and factored into the business valuation process. You will normally find that there is a fairly standard multiplier for different industry and business types. This multiplier will also be affected by other external factors and general market conditions at the time of sale. When considering the financials of a business which you are interested in always involve your accountant or financial consultant. Spending a little bit of time and money with these people at this stage can save you a lot in the long run.  

Your accountant will have had experience in dealing with business sales and purchases in many different industries. Accountants are well placed to advise about the suggested split between asset and goodwill which make up the purchase price. This split is really important at the point of purchase and also when you decide to sell the business on. When buying a business if the split between goodwill and asset is too much in the favour of the seller you may end up with an even higher tax bill when you sell.


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You may also be interested in:

Useful Links
Buying a business-Employer Obligations
Buying a Business - FAQs
Buying a Business-Important Points
Due Diligence
Benefits of registering as a buyer
How to raise small business finance
Business for sale-Buyers
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