Business Transfer: Everything You Need To Know About Buying an Existing Business

What is a Business Transfer?  

A business transfer refers to the transfer of an operating business to a new buyer, through means such as company shares acquisition or buying or selling of certain business operations of the company¹. Unless otherwise specified, the buyer, upon purchasing the business, also takes over all debts and responsibilities¹. Therefore, regardless of the business scale, one should not only focus on returns and revenue when buying a business,  but also understand the business' debt and financial situation of the business. Business transfers may seem simple, but buyers must demonstrate patience and unique perspectives to find the right business and seller. They need to be prepared for a possibly time-consuming and challenging process.  

 
Reasons for Novice Entrepreneurs to Buy an Existing Business 

The first step is always the hardest. For first-time entrepreneurs, a business transfer may be a shortcut for them, allowing them to quickly get involved in an operating business. This may offer the following market advantages that can help them solve challenges on their entrepreneurial journey:  

• Existing customer base² 

39% of the startups in Hong Kong find gaining customer trust to be one of the major challenges of entrepreneurship3³. One of the most prominent benefits of buying and taking over an existing business is the opportunity to acquire valuable intellectual properties, such as patents, trademarks or copyrights⁴. As these products or services may have already gained customer support², leveraging business transfer as a means to start a business could maximise the advantages of brand effects.  

• Operation-ready teams⁴ 

For some owners of small shops, it may be a one-man operation at the early stage of business. However, if you are considering running a business that values teamwork and collaboration, you may consider hiring your existing staff when buying an operating business⁴. Since they already possess ample knowledge of the business and have a tactical understanding of each other's working style, when managed properly, they would be your biggest aid in a smooth business transition⁴.  

• Directly overtake the original supply chain and resources⁴

Buyers can inherit the original operator's hardware facilities and supplier network through the business transfer⁴.  Take a bistro as an example: professional cooking stoves, wholesale food supply, food preparation techniques, etc., these are not easily accessible entrepreneurial resources for outsiders. Through buying and taking over an existing business, the buyers can easily gain direct access to these resources, without having to invest time and effort to shop around.  

What Should You Look for When Buying an Existing Business  

Although buying and taking over an existing business may seem to have a lot of benefits, is business transfer always the path to business success? Can entrepreneurs really reap the benefits without much effort? Before considering buying and taking over an existing business, budding entrepreneurs should grasp the following:  

• Do you fully understand the business you are about to buy?⁶

Do your homework beforehand and understand the business’ reputation, values and further development potential6 to find out if the company is involved in business disputes or lawsuits.  

• Can you take over an existing business directly?⁴ 

Learn all the details of the business transfer, e.g., patents, trademarks, copyrights, business licenses, etc. Be sure to take note of all the details of different contracts (e.g., client, rental, supplier, etc.).  

• What is the financial status of the current business?⁴

Before buying and taking over, check the financial status of the business, such as its profit and loss performance, earnings performance and projection, asset value and debts⁴. The buyer can obtain the relevant information from documents such as tax returns, accounts receivable and accounts payable records, balance sheets, profit and loss statements, cash flow statements, sales records, and etc. 

• Can the production equipment and facilities still operate normally?⁶

Ensure equipment and machinery can still operate well and legally. It is worth noting that the value of the production tools should not be determined by reference to  market value, but by depreciation at the time of entering into the business transfer agreement⁴.  

• Do you have relevant industry experience and expertise?⁶

It is true: at the initial stage of buying and taking over a business, you can directly inherit operational resources, staff, and daily workflows⁶, which is undoubtedly a big help for novice entrepreneurs. However, in a constantly changing market environment, possessing a certain level of industry experience and professional expertise is the key to sustainable operation and business expansion⁶.  

Are you planning to take the first step of your entrepreneurial journey? DBS SME Banking offers  the necessary financial support you need to start your own business. Click here now to learn more about SME instalment loans. 

The above information is only for your reference. For detailed information, please refer to the sources and seek professional advice if necessary.  

To borrow or not to borrow? Borrow only if you can repay! 

Article published on: 2 Oct, 2024

¹Source: The Univeristy of Hong Kong - Community Legal Information Centre - 3. Instead of setting up a new business, can I acquire an on-going business? What do I have to bear in mind if I intend to do that? (https://www.dbs.com.hk/sme/disclaimer.page?url=https://www.clic.org.hk/en/topics/businessAndCommerce/setting_up_business_in_Hong_Kong/types_of_business_organisation/q3)

²Source: Forbes - Should You Buy An Existing Business? (https://www.dbs.com.hk/sme/disclaimer.page?url=https://www.forbes.com/sites/theyec/2020/12/22/should-you-buy-an-existing-business/?sh=1f61f5cd4214)

³Source: HKTDC- Research - Analysis and News: Hong Kong Start-Up Survey: Strengths and Weaknesses of the Ecosystem: (https://www.dbs.com.hk/sme/disclaimer.page?url=https://research.hktdc.com/en/article/NjY2Mzc0Njkz)

⁴Source: HK：Hong Kong Trade and Industry Department - SUCCESS - Forms of Entrepreneurship - Acquisition (https://www.dbs.com.hk/sme/disclaimer.page?url=https://www-success-tid-gov-hk.translate.goog/tc_chi/sgbook/chapter_03.html?_x_tr_sl=zh-TW&_x_tr_tl=en&_x_tr_hl=en&_x_tr_pto=wapp)

⁵Source: Hong Kong Trade and Industry Department - SUCCESS - Industries and Products -  License/ Legal Document (https://www.dbs.com.hk/sme/disclaimer.page?url=https://www-success-tid-gov-hk.translate.goog/tc_chi/sgbook/chapter_04.html?_x_tr_sl=zh-TW&_x_tr_tl=en&_x_tr_hl=en&_x_tr_pto=wapp)  

⁶Source: business.gov.au - Buy an existing business (https://www.dbs.com.hk/sme/disclaimer.page?url=https://business.gov.au/planning/new-businesses/buy-an-existing-business)