For those lucky enough to have the cash to invest, acquiring an established venture can be a valuable route to future revenues.
"It puts you well ahead of the game, since the start-up phase is the most common time for a business to fail," said Cormac Mohan, head of the Business Advisory and Corporate Recovery Team at FM Auditors, Tax & Business Advisers.

By buying a business, Mohan said, entrepreneurs could avoid some of the pitfalls and difficulties associated with getting an all-new venture off the ground.

"For a start-up, 'time to profitability' - either months or years - is unpredictable," he said. "It is largely not under the control of the business owner, but rather under the control of the potential customers. During this period, the owner is not well compensated, if at all, and the business operates under a high level of stress."

Barry Kieran, managing partner of Amatino Partners, said that established ventures could offer new owners several benefits, including an established customer base, a proven product or service and the goodwill created by the previous owner.

"Such a purchase gives more certainty in terms of repayment capacity or return on investment than in a start-up scenario, but right now there is a very depressed level of activity largely arising from the availability of finance," said Kieran.

"The majority of deals are distressed sales with larger companies, in particular, looking for value among their smaller competitors."

Profitable history
Kieran advised purchasers to look for ventures with a solid history of profitability, sustainable cashflow, an established reputation and growth potential.

"Purchasing a distressed business can offer value, but only if you have the expertise and the means to make it work," he said. "Firstly, you must understand why the business is currently in trouble.

"Typical problems may include strategic misdirection, poor management or lack of capital. You must then consider your ability to solve the problem. Assuming the underlying product or service is good, you must think about whether or not this will give you a sufficient return on your investment."

To find out about available businesses, research relevant websites, newspapers and trade publications.
"Buyers can advertise their intent to purchase as many businesses will not advertise the fact they are considering a sale," said Kieran.

"You can also use your trade or market contacts, professional advisers and business networks. We would recommend a combination of trade contacts and advertising through your professional advisers."

Valuing the business
Businesses are generally valued at a multiple of relevant earnings plus, if applicable, a sum for the business assets purchased as part of the transaction.

"Relevant earnings are normally calculated as an average cashflow over the last three years with adjustments for items such as expenses directly attributable to the previous owner," Kieran said.

"The multiplier used will be determined by the results of the due diligence and the return on investment required."
Price determinants include the company's profitability or repayment capacity and the certainty of income or cashflows.

"Other determinants include the growth or cost-saving potential for the new owner, the degree to which the business is reliant on the current owner for its financial performance, ownership of patents or proprietary knowledge and the strength of customer base," said Kieran.
It is crucial that you do your research before committing to an acquisition. At the very least, Kieran recommended a thorough analysis of the company's management accounts and a review of financial statements going back three years.

"Look at the company's top ten customers and suppliers and be wary of over-reliance," he said. "Look at the strengths and weaknesses of the current management team and research the market, trading environment, legal or regulatory issues and potential changes. Also review competitors, as this will give a good initial indication of the stability of the business prior to entering into full due diligence."

Warning signs
Before you sign on the dotted line, carry out a thorough financial review to assess the company's commercial viability.

"Warning signs that something may be amiss will include unexplained trends in the financial performance, which may be contrary to market trends, or erratic financial performance," said Kieran.

"Look out for over-reliance on a single - or small numbers of - customers, contracts or suppliers, issues with Revenue, over-reliance on short-term finance or debt judgments registered against the business in the past."
Limited companies with a poor history of filing with the CRO should also be avoided, and Kieran also advised purchasers to assess the company's culture and the potential for hidden problems.

"You may inherit certain issues such as potential claims or an undesirable staff culture," he said. "Small businesses tend to be identified with their original owner and the purchaser may struggle to rebrand or retain customer loyalty. You could also face the possibility of future competition from the previous owner, their family or current staff."

Due diligence
The due diligence process should give you a realistic picture of how the business is performing and what its future prospects are.

"There are traditionally three types of due diligence you should do and you might need different advisers for each," said Mohan. "Legal due diligence is part of a sales and purchase contract. This is where the solicitors check that the business has legal title to sell, ownership of all the assets and that regulatory and litigation issues are fully addressed.