What are possible reasons for buying an existing company as opposed to starting a new business from scratch?

Buying an established business rather than setting up a new business has many advantages but is not without risk. You will need to know the advantages and disadvantages of buying an existing business and be clear about your ability to run a business.

Advantages of buying a business

Buying a business is generally considered less risky than starting your own business, especially if you can buy a well-managed, profitable business for the right price. Consider these advantages:

• The difficult start-up work has already been done. The business should have plans and procedures in place.
• Buying an established business means immediate cash flow.
• The business will have a financial history, which gives you an idea of what to expect and can make it easier to secure loans and attract investors.
• You will acquire existing customers, contacts, goodwill, suppliers, staff, plant, equipment and stock.
• A market for your product or service is already established.
• Existing employees and managers will have experience they can share.

Disadvantages of buying a business

Keep in mind that not every business on the market is a good prospect. Many owners will be selling unprofitable or under-performing businesses. While this can be a chance to buy and develop a cheap business, it can also be a risky investment. Consider these disadvantages:

• The business might need major improvements to old plant and equipment.
• You often need to invest a large amount up front, and will also have to budget for professional fees for solicitors and accountants.
• The business may be poorly located or badly managed, with low staff morale.
• External factors, such as increasing competition or a declining industry, can affect future growth.
• Under-performing businesses can require a lot of investment to make them profitable.
• The seller's personality and their established relationships may be a major factor for the success of the business.

Unlike other brokerage firms, over half of Viking M&A Senior Advisors have been business owners. With a keen understanding of what it takes to both buy a business and to build a business from scratch, we have gathered the pros and cons to consider if you are thinking of buying a business vs. starting one. 

Buying a Business vs. Starting One: Passion & Interests

What are you interested in or excited about? If you have a truly groundbreaking business idea that you are passionate about, starting a new business may actually be your only option. If the business you want to own does not yet exist, it may be up to you to start it. However, if you have skills, knowledge, or an interest that you care about, consider looking into businesses for sale in that industry to see if anything looks like a potential fit. Buying an existing business vs. starting your own is not a reflection of the amount of passion or interest you have, but rather a matter of where you can best put that passion to use.

Buying a Business vs. Starting One: Focus & Responsibility

Starting a business from scratch requires an all-in single-mindedness that is committed to choosing the business over all other obligations. As a startup entrepreneur, every decision and outcome is on you. With that in mind, if you want to have your hands in every detail of the business, holding direct responsibility for all aspects of the company, then a startup is likely exactly what you are looking for. On the other hand, perhaps you are interested in owning, running, and growing a business, but without the do-or-die pressure of getting (and keeping) a startup off the ground. According to a 2018 report from the SBA’s Office of Advocacy, approximately 50% of new businesses fail within the first five years. Buying an established business allows you to continue building and growing on the existing foundation rather than committing to the all-consuming nature of starting a business from scratch.

Buying a Business vs. Starting One: Investment & Cash Flow

How much capital do you have available? One benefit of starting your own business is you can try to craft it according to your available capital. Buying an existing business is almost always more costly upfront than starting your own. However, it is also easier to get financing for buying a business vs starting one. Lenders and investors are much more comfortable working with a business that has a proven track record. Which brings us to the topic of cash flow. Simply put, an existing business will have it, and a startup will not. Startups require an upfront investment with no initial return. Consider how long it may take to break even and how you will continue to fund the business (and support yourself) until it becomes profitable. On the other hand, a business worth buying will have existing cash flow that will free you up to focus on growing the business rather than just staying afloat.

Buying a Business vs. Starting One: Structure & Reputation 

Are you energized by the prospect of establishing a team of staff members and company infrastructure from the ground up? This is a crucial element of starting your own business. Buying an existing business offers the benefit of an existing staff & structure that you can step into and build upon — if you choose wisely. Do not underestimate the importance of ensuring you and the existing company are a good fit for each other. There will be a period of transition regardless; how smooth that transition goes will depend on whether you did your homework when choosing which business to purchase. In a similar vein as creating teams and structures, some entrepreneurs relish the idea of creating a new brand identity and of building a solid reputation and client base from the ground up. This takes a great deal of time though, and unless this is part of your specific passion, the lack of an existing client base will be more of a liability than an opportunity. Consider that a business worth buying will have already established recognition and credibility, which will provide a solid foundation on which you can continue to build. 

If you think that buying a business may be the best fit for you and for your goals, one of the very best things you can do is involve a professional business broker. Viking Mergers & Acquisitions can help you navigate the process of not just buying a business, but also identifying the business and seller that are the right fit for you. As we mentioned above, over half of our employees have owned their own businesses, so we have been in your shoes. We are there for our clients every step of the way, and we specialize in selling businesses that are solid investments. 

My 16+ years of entrepreneurship gives me hands-on, firsthand experience in assisting other entrepreneurs in planning their exit strategies. I survived the struggles and pitfalls of selling a business and now I guide and protect entrepreneurs in completing what is for most, the single largest transaction of their lives.

Are you interested in buying a business or learning more about the process? Contact us today.

1 https://www.sba.gov/sites/default/files/advocacy/Frequently-Asked-Questions-Small-Business-2018.pdf

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