Investing in Asia: Starting a New Business or Buying an Existing Business

When a foreign investor want to start a business in Asia he/ she will have basically 2 options. The first option is of course to start a business from scratch the second option is to buy an existing business. Both options have benefits and drawbacks as I will explained below. Kindly note that my comments below are accurate whether you decide to start a business in Thailand, China, Myanmar, Cambodia or in any other part of the world. Indeed there are some principles that are the same wherever you do business. Note also that the comments I made below are true for most type of businesses. 

Starting a New Business

Benefits

The advantages of starting a business from scratch are that you will be in full control and will be able to develop the business according to your own specification.

It may cost initially less to set up a new business than to buy an existing one because of course most sellers of ongoing concern wants to make a capital gain when they are selling their businesses.

Drawbacks

Now the problem when starting a business from scratch is that you will have to invest to fit the business and then you will have to be able to inject into your business enough working capital to sustain until it becomes profitable

Unfortunately many investors forget this part in their business plan (when they have one). Indeed it is actually not very complicated to figure out what it will cost to start a new business from scratch. What is more difficult is to do a proper estimation of how long time it will takes for a business to make enough income to become profitable. My personal experience is that most people get this part wrong and fail because of this.

Many investors have enough capital to start their business but when 3 months down the road there business is still not profitable they don’t have any more capital to inject. The lucky one will be able to find an investor that injects some capital and the unlucky one will have lost their saving.

Buying a Business

 Benefits:

The main benefit of buying an actual business is that you are buying an ongoing concern with an actual turnover. Therefore you may need to pay more to start your business than if you started your business from scratch but then you will not have to keep injecting working capital into your business.

This of course if you don’t touch the existing business concept, because if you buy a steak house and transform it into a vegetarian food shop you will lose the turnover your purchased in a minute (don’t laugh I have not yet seen this one but a few similar cases when a change in concept has ruined a good business in a matter of weeks).

Drawbacks:

The drawbacks will depend on how you structure the acquisition of the business you are purchasing.

Buying the Business and the Operating Company

If you purchase the existing company that is running the business then you can expose yourself to liabilities issues such as unpaid suppliers or taxes liabilities. Also you may realize after a few weeks that the income figures given to you where not corrects or that some costs were hidden.

Example: Two English guys purchased a bar in Bangkok. The location was great the business had a low turnover but a lot of potential (the low turnover was due to the fact that the bar has not been renovated in ages while the other bars in the place have all been renovated). The monthly rent was low and expenses were low so despite the low turnover the place was generating a profit margin. So providing the two investors invested some money in the place they had made a really good investment. Did they? Now they did not think it useful to have a lawyer and they purchased the place without checking the lease agreement. Three months after they purchased the bar for 150,000 USD the lessor knocked at their door explaining them that the lease was to be renewed next month and that would they be kind enough to remit him the 150,000 USD of key money for the next 3 years. This was why the rental was low because every three years the bar owner had to pay a key money for the next period. They did not have the 150,000 USD and had to take a partner and from one day to the other they went to the status of business owner to the status of minority partner.

I took the example of this bar business because this was the most shocking one but I have seen people makes the same kind of mistakes in many other businesses sectors such as manufacturing, hotel businesses, restaurant, consulting businesses. In every of those cases the investors have purchased the businesses without doing a due diligence and have missed a problem which when they discovered it ruined their hope to ever be successful. The luckiest one was able to sell to another unwearied investor but most of them lost their investment.

Now another option is to purchase the business only without purchasing the company running the business.

Buying a Business (without the operating company)

This option is good for the buyer because the liabilities attached to the first company do not pass to the new business owner (if they had started a new company our two English investors would have had to make a new lease agreement with the owner and would have then become aware of the key money issue before to buy the business).

Unfortunately this option may not be always available because the existing business has licenses that are difficult to obtain or in some cases that cannot be obtained anymore.

Example: For example a client wanted to purchase a medicine factory that was located in an area that was now in a residential zone area. If he decided to purchase the company that was operating the business he could continue to operate the business as it is but there was a potential tax liability. If he was buying the business without the company operating it he would not have to face the liability but the license to operate the factory was not transferable and he could not obtain a new license to operate the factory because it was situated in a location that is now residential area (the license was obtained at a time where there was no zoning). The client did not purchase the factory.

So many times investors have no options than to purchase the existing business and the company operating said business which means that they will have to do a due diligence. We will discuss the matter of the due diligence in another post. Before this I want to make one last comment

Should You Buy a Distressed Business?

It may be possible to buy a business on the cheap but my experience tell me is that you should only buy a business in distress when it is possible to establish absolutely that it is not the business model that is wrong but the management that is bad. (Two of my clients purchased recently a jewelry factory in distress because the due diligence could pinpoint that the losses were occurred because of the failure of the existing management to run the business properly. In a few months they turned the business over and it has now become profitable).   

But if a business model is wrong, because of a bad location, or a bad concept then changing the management will not help to turn the business around. You have businesses that simply cannot be saved and you should stay away from them

Should you buy a Cheap Business?

If a business is for sale for 30,000 USD the chances are that this business has a very low turnover and is the kind of business that will never be a money maker. Stay away from those kind of opportunities. There is no such a thing as a free lunch

Do not hesitate to contact us for more information on how to invest into Thailand, China, or Myanmar

 

Originally posted 2012-04-06 09:09:43. Republished by Blog Post Promoter