Is it risky to buying and existing business?

To expend your business, adding a new company portfolio can be a good decision. If you buy an already established business, it can help you to grow your business, customers’ base and company’s reach. Growth through acquisitions is often seen as a quicker and less difficult alternative to organic expansion. Let’s discuss in this article that what are the cons and pros of buying an existing business. Which will make clear that if it is risky or not buying an existing business.

Pros/ benefits of buying an existing company in your industry.

Fewer new concepts to master

When you first started out, a lot of your focus was on researching your industry, drafting your company plan, and establishing standard operating procedures. The culmination of your efforts is the purchase of a new company. You can easily add on a new business as you already know where the hazards and opportunities are, saving you time and effort.

It’s safer.

When you buy an established company, you have the sales, revenues, and infrastructure of an established business without the inherent risks of starting from scratch. Though tweaks to the business plan and procedures may be necessary, doing so is safer and simpler than starting from scratch.

Save money.

When buy another business that allows you to sell more of your products at a given price. Which as a result helps you save money per unit. If you can buy more products, you might be able to save money buying supplies in bulk.

Expansion into new areas.

Growing your business geographically will boost your revenue and clientele. It could also present fresh chances for advertising that wouldn’t work well in a more constrained setting.

Integrating up and down at once.

As a result of your company’s recent purchase, it may now be able to “vertically integrate,” or take over many stages of the supply chain. Owning your supplier can help you save money and maintain high quality standards. Owning your distributor can help you save money on shipping and give you more say over the customer’s experience at retail.

Broadening product line:

A company acquisition could let you enter new markets and sell more of your wares. By acquiring Natura Pet Products, consumer goods giant Procter & Gamble was able to expand into the growing holistic and natural pet food market.

Which merger or purchase would best help you develop new offerings of your own?

Simpler to determine true worth.

When deciding how to put your retained earnings to work, knowing the true worth of your company is essential. Buying an established company in your field will allow you to predict future profits with more accuracy thanks to your familiarity with the industry and the company’s track record. A more precise estimate of your company’s true worth can then be made.

Cons of buying an existing business

Mistakes in advertising.

It’s human nature to want to stamp your own identity on a newly acquired business. While this can work in your favour, it may be a disastrous move if the corporation in question is responsible for a much praised product.

Let us take the example of Yum Yum Donuts here. When Yum Yum Donuts bought Winchell’s Donuts, they didn’t rebrand the business as Yum Yum. They realized it would be foolish to throw away the good name and history their ancestors had worked so hard to establish.

Difficulties in bringing the business together.

Integration can be difficult if the acquired company has a different culture than your own. Pay special attention to the company’s values and methods of doing business as part of your due diligence, and address any issues you find before closing.

The seller’s obligations are not resolved.

Buying an existing business is not always an easy decision. You should assume that any business you purchase will have hidden costs. The vendor will usually be eager to reveal any hidden issues because failure to do so could result in legal action at a later date.

Take your time and make sure everything is taken care of if the seller comes clean about any hidden debts or issues.

The decision to keep the management was not adequately evaluated.

Taking a decision of whether or not to keep the existing management team is not easy and should take this decision carefully and wisely. Sometimes, it is not possible to provide your own management and in that case you have to continue with the current management team.

Keeping the same management in place might be crucial to keeping your top customers in some relationship-based firms.

However, if the current management is ineffective, it may be necessary to make changes.

Nobody who supplies the seller will do business with you.

If you buy a rival company in order to gain access to their product catalog, but its distributors refuse to sell to you, the purchase was a waste of capital. Make sure your supplier is committed to selling to you once the deal closes.

Overleveraging

A company’s largest risk is overleveraging to finance growth or acquisitions. Business people utilize “leverage” to borrow money to expand and increase profits. Leverage sometimes help while sometimes hurt. If you cannot pay your debts, your firm may fail.

Keep in mind that a seller that offers you financing may not care much about the danger you’re taking on. Because if you can’t pay, he’ll just declare you in default and take the company back.

Other methods for avoiding over-borrowing:

• Try to avoid taking out any loans.
• Construct with accumulated earnings.
• Borrowing should be capped at one of two extremely low percentages:
• Paying off your debt should use only a modest portion of your annual income.
• Make the long-term loan payment quickly. Borrow for six years if you can pay it back in three.

• The accounting controls are inadequate.

It’s possible that your business’s current accounting system isn’t equipped to handle operations as a whole. Before closing, discuss the big picture with your CPA and put the right systems and people in place.

The annual financial accounts should be audited as part of your acquisition program. This is pricey, but necessary to get financing and calm the nerves of everyone involved.

All of the aforementioned points can assist you in analysing and making an informed decision on whether buying an existing business is suitable for you or not.”