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Whether it’s wanting to expand an existing business, looking to penetrate an industry by acquiring an established brand, or simply wanting to skip the startup phase, there are cases when purchasing a business makes more sense than launching a new one.
This article tackles what you need to know when you’re considering acquiring a business in the Philippines.
The Pros and Cons of Buying an Existing Business
As with most things business-related, there are pros and cons to acquiring an existing business. Below are some of the things you should keep in mind when eyeing an existing business.
You get a proven business concept
As you might expect, there are a plethora of things that come with looking to launch a brand new business. There’s the prospecting of the market, conducting various feasibility studies, costing, among a slew of other things you need to think about.
This process is eased greatly when you acquire a business that’s already proven to work. More often than not, you already have a physical space for operations, equipment, a customer base, vendor and supplier base, existing employees and company policies, etc.
While you might opt to re-calibrate some of these to align with how you prefer to run things, it always helps when you already have an existing structure in place – enabling you to skip the startup phase and get down to business.
Lower initial operating costs
In the same vein, the primary benefit of acquiring a business is the lower initial costs. Say you want to purchase a bakery, you don’t need to buy all the equipment necessary to get the operations up and running. You also don’t need to pour resources into hiring employees or developing brand new marketing strategies.
This allows you to allocate resources into areas that can improve the current infrastructure.
It’s easier to get additional financing
When you acquire an existing business, lenders and financial institutions typically consider it a safer bet than a brand new business that doesn’t yet have the books to prove its capabilities. Similarly, potential investors also have past data to look at.
This means that should you need additional resources, you should have a much easier time convincing people to give it to you.
Related: How to Fund & Finance your Business
Higher Upfront Investment
While one of the pros listed above was the lower initial costs to get the business up and running, the other side of that is you will need to shell out more to actually purchase an existing business. Because apart from the physical assets, there’s also valuation placed on things like customer base, branding, R&D, and intellectual property, among others.
Lack of familiarity
While certain systems and processes may have already been operating for years, there will inevitably be a learning curve when you take over an existing business. From the industry to your products, to the different departments and employees, be prepared to learn a myriad of things entailed by acquiring an existing business.
Potential unforeseen hiccups
In line with the above, you need to also be prepared to discover some hidden problems right below the surface. When you’re purchasing a house, for example, that perfectly fine looking guest bathroom might actually have a leaky sink when used for too long. Almost all businesses have issues that might take a while to surface.
Maybe it’s equipment that’s more expensive to maintain than you expected. It could be an unforeseen increase in business permits. Or perhaps a disruptive competitor that you didn’t see coming. There will be issues. You just need to do your best to be even-keeled when they pop out.
How to Buy a Business in the Philippines
After getting a glimpse of the possible pros and cons of buying an existing business, there are some key steps you need to take before moving forward.
There are things you need to seriously ponder if you’re to make a wise choice. Below are some of them.
Step 1: Decide which type of business you want to acquire
One easy tip for making sure you don’t buy into potential problems is to make a shortlist of the things you’re interested or good in and/or are passionate about.
This increases the chances of you enjoying the new venture, while narrowing down what types of business will actually be a good fit for you.
For example, if you’ve had some experience in digital marketing, perhaps a design studio would be up your alley. Or if you’ve had experience in sales, maybe a logistics company would be a more preferable choice (if you have the resources).
It’s easy to find a company with a financial track record that makes sense. Actually being aligned with what the business is at its core and being familiar with the industry and potential challenges is an entirely different story.
Step 2: Find businesses that are for sale
When you’ve taken the time to figure out which types of businesses are aligned with your own personal interests, values, and experience, you can begin looking for ones that are for sale or could potentially entertain the idea of being acquired.
The easiest way to go about this would be to go on business marketplaces to browse active listings.
Here are some of the most popular business marketplaces in the Philippines:
You could also go old school and check newspapers’ classified ads section and speak to your business owner connections to ask if they know of other entrepreneurs who’ve put their businesses on the market. Alternatively, you could also go to industry expos to network with other business professionals for potential leads.
You could also enlist the help of a business broker, although it’s important to note that being as they usually represent sellers, you should be as discreet as possible with the amount of info you convey (as this could be used against you in negotiations).
So while you may not outright be able to acquire a business through the help of a business broker, having the right conversations with them could help you understand better which types of businesses could be available and fit what you’re looking for.
Step 3: Find one that matches your goals and capacity
We’ve alluded to this earlier, the value of finding a potential business acquisition that’s aligned with your goals and values. But of course, you also need to find one that matches your capacity – both to operate and your resources.
It’s important to note that this goes beyond the ability to acquire a business and have enough resources to seamlessly transition into new ownership. It’s also being able to forecast what you’ll need (in terms of capacity to operate and finance the business) to sustain the new business acquisition.
Step 4: Conduct research, financial analysis, and due diligence
This is very much in line with the previous step. As a general rule, you should look into a business’ financial records for the past three years. This encompasses balance sheets, profit and loss statements, tax returns, sales records, and bank statements. When doing so, check the integrity of those records and see if there’s growth potential.
Additionally, check if there are any tax implications. This includes things like relevant provisions of capital gains tax law and securities transfer tax implications. When you acquire business assets like buildings, or purchase shares in the business, there will be a security transfer tax. You want to make sure you don’t overlook these.
You also want to look deeper into why the current ownership is looking to get out. They might be privy to certain industry trends, so you’ll also want to include this in your due diligence.
So in essence, look into everything. Market trends come and go, but things like turn around time on stock, legalities, and the myriad of other things that surround business operations will add up to greatly impact how successful you can actually be in your venture.
Step 5: Read and review the documentation
Once you’ve reached an agreement with the seller, you then need to manage the risk of buying the business by doing the following things:
- Ensure the seller provides you with the agreement offer, duplicate of lease, and the vendor’s statement.
- Demand the privilege to deal with the business before going into a coupling contract. This enables you to probe the veracity of the seller’s claims.
When checking the prospective acquisition’s finances, take a closer look at the following:
- Purchase price
- Transfer stamp duty
- Working capital requirements. This is usually shown by the cash flow projections.
- Professional fees and other charges related to the purchase.
- Loan repayments, servicing costs, if any.
For other documents, your lawyer or accountant should be able to identify other pertinent documents such as property documents, equipment/asset listing, brand assets for advertising materials, intellectual property assets, insurance coverage, employee policies and contracts, incorporation information, and customer lists, among others.
Step 6: Initiate the transfer
In prepping for the transfer, make sure you do the following:
- Prepare the proposed assignment of the lease.
- Employ business name registers to look through the name of the current business. This guarantees the seller has full rights to exchange the business to you.
- Ensure that present contracts are traded to you as an element of the deal.
When you sign the agreement, make sure you:
- Make sure the seller gives the marked contract.
- Return a signed copy of the contract to the seller.
- Pay the preparatory or full deposit (depending on your agreement) and obtain the receipt.
Tips for Buying a Business
We’ve discussed most of the things you should include your due diligence, but here are a few more things to keep in mind when looking to buy a business.
Keep an eye out for future developments that could impact the business
While there really is no way you can manage every potential risk (such as the Covid-19 pandemic), there are certain scenarios for certain types of businesses that you can intelligently forecast.
For example, if new roads are going to be built where a business is located, that would certainly have a positive impact on it, whichever industry you’re in.
Recommended Reading: 150+ Profitable Business Ideas in the Philippines
Try to have the seller mentor you for a certain period of time
If they’re amenable to it, try to arrange for the seller to mentor you in learning the ropes of the business. This is particularly important if the business requires much technical in industry-specific know-how.
Personally inspect the quality of the premises and assets
While most prospective buyers will certainly pay the business’ physical space, they may not be as probing when it comes to its assets. Whether it’s the software used on office computers, vehicles, or even things like the employee bathroom, you need to check these things.
Keep the Bulk Sales Law in mind
The Bulk Sales Law is designed to protect creditors from debtors who might try to evade their liabilities by selling certain types of assets in bulk. So make sure to check if there are liabilities that come with the purchase.