Buying a Business vs. Starting a New One: Consider These Pros and Cons
You’ve always wanted to own a business and go down the path of entrepreneurship. But you know starting an LLC from scratch can be time-consuming and financially draining. Maybe you should just buy an existing business instead? Is there a right or wrong decision when thinking about starting a business vs. buying one?
If you’re looking to buy a business, it’s not as simple as making the purchase and then sitting back and collecting revenue — if only it were that easy! This article will help you understand a bit more about what to expect when you buy a business, as well as look at the other side of the spectrum: maybe you’re better off starting your own.
Pros and Cons of Buying a Business
When considering starting your own business, there are a lot of factors that come into play, some of which are good and some of which are bad. Regardless, only you can weigh out each and decide if buying a business is the route you want to go. Below outlines a few pros and cons when it comes to buying a business.
Pro: Brand and Customer Base Are Already Established
One advantage of buying vs. starting a business is that the business is already established and people know about it. There is likely already a loyal customer base. Marketing strategies may already be in place. This will all give you a leg up on growth potential when compared to starting a business from scratch where a lot of money could need to be invested in marketing the business and gaining attention.
Pro: Easier to Get Financing
Banks love to see minimal risk when providing a business owner financing. By having an established business, the bank can see the financials and get a better understanding of whether or not you will be able to pay back any business loans you open. When starting a business, it can be quite common that a bank will deny a request for a loan.
Pro: Potential to Expand
Are there new markets you could gain entry into? Brainstorm ideas and write down the necessary steps you plan on implementing to further the business’ growth. Create a timeline of when you want things completed and how you plan on capitalizing on these changes. What will your marketing strategies be? Are you improving upon an existing service and need to share these changes with your existing customers? How will you spread the message on social media? Be prepared to add value to the customer experience.
Con: Stepping into a Sinking Market
Something else you should be familiar with, regardless of if you are starting a business or buying one, is the competition and landscape of your market. Is the market as a whole showing growth, or is it slowly dying? Sometimes businesses get sold because they are not doing well or there’s no longer a need for its products or services. If it looks like this market is in a downward spiral, do you think it’s a good idea to buy a potentially sinking ship?
Con: Needing to Change Staff
How are the employees and staff at the business? Are they hardworking or are they lazy? Are they happy or irritated about a potential new boss? Will they be on board with any changes you make? You need to quickly figure out who your leaders are and who is keeping the business from moving forward. It is possible you may need to let people go and hire new staff, which takes time and can affect the company culture.
Con: Taking on the Business’s Problems
Any issues that exist with the old owners are now your responsibility. You need to be aware of any invoices that have not been paid, any delinquent payments out there, if there were quality or customer service issues, etc. When you buy vs. start a business, there is a chance you take on all of the debt and issues that transpired prior to you owning the business. Get all of this information up-front so you don’t have any surprises after you sign on the dotted line.
Pros and Cons of Starting a New Business from Scratch
Maybe when reading the above, you weren’t too keen on potentially taking over a money pit or fixing potential problems of someone else’s business. In that case, you may want to consider starting your own business rather than looking to buy one that already exists. Incfile has a ton of great resources to help you form your own business.
Pro: You Get to Build Your Dream
There’s nothing better than starting your dream from scratch and seeing it through to the end. Unlike when buying a business, right from the start, you get to build the foundation of your business how you want. You have a blank canvas that you get to paint with whatever color and using whatever tools you deem necessary. Sure, when buying a business, you can also change a lot of things, but that will take time and money (neither of which you may have).
Additionally, you get the satisfaction of knowing you took an idea (not one that someone else had and started) and build upon that idea. Ultimately, the sky is the limit with what you can do right from the start. This is sometimes easier than trying to change things at an established business that have been in place for years.
Pro: Smaller Investment Needed to Get Started
If you were to buy a business rather than start one, you could be out six figures or more from day one. When you start your own business, you can invest a small amount and add additional funds as you need them. There are many businesses that start with next to no money invested. The less money you need to dump into the business to get it started and off the ground, the better. This also prevents you from potentially needing to go out and secure a loan or financing.
Pro: Create Your Own Company Culture
When you start your own business, you have the power to hire whomever you want. This is very different from buying a business and getting the employees that come with it. If you’re starting from scratch, you can interview multiple candidates and hire the one that fits your needs and wants.
While starting your own business is a lot more stressful for most people, it can also be extremely gratifying. You can build your own company culture from the beginning instead of adapting one that may not jive with your core values and ethics.
Con: More Difficult to Get Funding
Unlike an established business that has financial records, you’re starting at zero when starting a business. You need to convince the bank to give you a shot and provide you with the funds you designate to start your business. Many banks will not provide funding to startup businesses and this can create a real problem if you are in dire need of money. It can take some time and patience to go out and ask several banks for funding until you get a “yes.”
Also, asking an investor for money can be an issue. For them, it’s a risk versus reward scenario, and if they don’t feel you have a good business plan and model, they’ll turn you down. However, there are some investors out there who love to work with startups they believe in. The key is to vet out investors who have already shown an interest in startups or who have a portfolio full of businesses that yours would fit into nicely.
Con: You May Not Be Able to Pay Yourself for Years
According to FreshBooks, a new business owner could go without paying him or herself for the first three years of business. There’s a small percentage that’s able to pay themselves the first year. Don’t let that deter you from starting a business, but it’s a statistic that you need to be made aware of. That said, some businesses can grow quickly and allow the owner to take a paycheck. It truly depends on how the business is received, if it gets the attention it needs and if sales take off quickly.
Con: Higher Risk
Fundera reports that, on average, 20 percent of businesses fail their first year. Thirty percent fail in their second year. Fifty percent fail by year five. And lastly, 70 percent of businesses won’t make it to year 10. Those numbers can be incredibly intimidating. Don’t let that scare you away, though. If you have a great idea that solves a problem and is in demand, see it through if you are willing to put in the time, money and effort. That said, even great ideas can fail. It’s just part of starting a business.
Starting a Business vs. Buying One: Which to Choose?
In the end, which is the best decision for you? Whether starting a business or buying one, there are a lot of things to consider. Both can bring high risk, high costs and a high level of difficulty to succeed. It all comes down to a couple of key considerations.
Does Someone Already Have Your Dream for Sale?
When considering starting a business or buying one, the decision could ultimately come down to a business opportunity “falling into your lap.” While this doesn’t happen often, sometimes luck is on your side. That said, for the right price, someone may sell you their business if they’re considering an exit and you come along.
If you have a vision for a business and someone else already has it, do your homework. Find out if the business is doing well or if it’s burning money each month — and find the reasons why for both scenarios. Should you decide to buy an existing business, ask to see their books. This will give you an idea of how successful and profitable (or not) you may be should you buy.
Is There a Gap in the Market That You Can Fill by Starting a Business?
Do you have a great business idea that no one has built? Is there a gap in the market where you can come in and capitalize by solving a problem many face while there is no competition? This is called a “blue ocean.” If so, go for it: register your business and get to work.
There Is No Wrong Decision
The debate between starting a business vs. buying one does not have a right or wrong answer. It all comes down to your individual needs and situation. Take your time to ensure you make a decision based on all of the information you gathered. Never make a decision quickly or without looking at things from all angles.
And don’t forget that you don’t have to go it alone. Incfile is here to partner with you, whether you start a new business or purchase an existing one. Our tools and resources can guide you in the next step of your business journey.