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Start or Buy a Business?

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Entrepreneurs that want to be their own boss and manage their own business must face the question, “Should I buy an existing business or should I start one from scratch?” There are advantages/disadvantages to buying a business and advantages/disadvantages to starting a business. Ultimately, the answer for each person depends on their particular circumstances but this article identifies some key issues that each person should consider. 

 

Generally, the biggest benefit of starting a business from scratch is lower initial investment and capital is needed. However, start-up businesses generally require a significant amount of working capital to support the business and owner’s personal expenses while the business is growing. Probably the most significant error most business start-ups make is underestimating how much working capital is needed to survive the start-up phase before the business becomes profitable. Business plan pro-forma’s often show very optimistic and unrealistic sales results that are not supported by the realities of acquiring customers from a time or expense perspective. In addition to inadequate working capital, risks also include lack of a business plan, poor location, and inadequate marketing among many other causes.  It has been estimated by many sources that 80% or more of start-up businesses fail within five years.

 

The risk of a start-up business is probably the single most compelling factor to buy an existing business since an existing business already has customers, employees and established income. So while the initial investment is usually much higher, the risk and return on investment when buying an established business are on average more favorable.

 

The International Business Brokers Association (IBBA) identified the following list of reasons to consider the purchase of an existing business rather that starting one:  

 

§         Proven Concept.   Buying an established business is less risky – as a buyer you already know the process or concept works.  Financing a purchase is often easier than securing funding for a start-up business for that very reason—the business has a track record.  A bank will be able to look at the historical results for the business, not just rely on projections.   

§         Brand. You’re buying a brand name.  The on-going benefits of any marketing or networking the prior owner has done will transfer to you.  When you have an established name in the business community, it’s easier to place cold calls and attract new business than with an unproven start up.  That’s an intangible benefit that’s difficult to put a price on.

§         Relationships. With the purchase of an existing business, you will also be buying an existing customer base and vendor base that took years to build.  It’s very common for the seller to stay on and transition with the business for a short time to transfer those relationships to the buyer.  

§         Focus.  When you buy a business, you can start working immediately and focus on improving and growing the business immediately.  The seller has already laid the foundation and taken care of the time-consuming, tedious start up work.  Starting a new business means spending a lot of time and money on basic items like computers, telephones, furniture and policies that don’t directly generate cash flow.