Buying a Business Versus Starting a Business
Written by Domenic Rinaldi for Gaebler Ventures
Buy a business or start a business? Purchasing a business has some inherent advantages over starting a business from scratch.
For those who want to become an entrepreneur, there's a fork in the road on the path to entrepreneurial riches.
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You have a choice to make: start a business from scratch or purchase a going concern. Which way will you go?
Each option has its advantages and its disadvantages. There's no right answer.
Arguing in favor of "start from scratch" are those who say that it's cheaper to start something on your own. You can put your personal stamp on the business. You can enjoy the excitement of coming up with a name and designing a logo. You are in control, and are not subject to the legacy and business decisions made by another business owner in years past.
Nonetheless, many business experts recommend purchasing an existing business.
If you start the business on your own, the risks are greater. Failure rates are very high for new businesses.
As such, purchasing an existing business reduces your risk considerably.
Beyond reducing startup risks, here are ten additional reasons to buy a business rather that start a company from scratch:
- Speed to Critical Mass. In my experience, it typically takes three years to start a new business from scratch and get it to the point where operations are running smoothly and profits are coming out of the business on a consistent basis, assuming you get that far. When you buy a business, however, the business is likely already at this stage of business maturity.
- Immediate Access to Cash flow. When an entrepreneur starts a business from cash, cash flow is extremely tight. These "starving" entrepreneurs often incur personal debt while they hope and pray for revenues to start flowing in. In contrast, business buyers walk into a situation in which cash is already flowing. When the deal is structured properly, they can cover any debt service, take out a nice salary, and fund investment in the growth of their business.
- Profit Focus. Starting a new business from scratch involves spending time and money on thing like logo design, office furniture, computers and other things. All of these things deplete your checking account balance and, more importantly, distract you from doing the things that matter most: generating revenues and profits. In contrast, when you buy a business, most of the minutiae has already been taken care of. As such, you are able to immediately focus on making money, which is always the best use of your time as a business owner.
- Tested Concept. A business started from scratch is unproven. Customer demand is a possibility, but it's not a sure thing. In contrast, when you buying an established business, you know whether there is demand for the company's offerings. Again, this reduces risk because it eliminates uncertainty.
- Established Brand. When you purchase a company, you're getting their brand too. All of the investment the previous business owner has made in promoting that brand accrues to you as the new business owner. In contrast, creating a new brand and building up awareness and reputation is a costly and time-consuming undertaking for a business owner who starts a company from scratch.
- Experienced Staff. Ask any business owner what the key to business success is and odds are they'll say that good people is the key driver of success. When you buy a company, one of things you are buying is the people. The selling business owner made a considerable investment in forming that team. Most likely, he's screened out any dead wood in the bunch. Don't underestimate the value of not having to hire people from scratch. It may sound easy enough, but hiring good employees is far from a slam dunk.
- Pre-existing Customer Relationships. It's so important, but it's easy to overlook this particular advantage of buying a business over starting from scratch. When you acquire an existing business, you get the existing customer base. For a startup entrepreneur, going with a new venture started from scratch, it could take years to get to that level of customer relationships.
- Reliable Vendors. A business owner who is starting from scratch will spend a lot of time sourcing vendors. Who's trustworthy? Who's reliable? Who's affordable? These are tough questions to answer. In contrast, when you buy a business, you get access to the seller's prior vendor relationships. That's incredibly valuable, and it allows you to focus on selling, not on things that don't necessarily help you in your quest to generate profits.
- Breathing Room. Time is the scarcest commodity for business owners. It's especially scarce when you start a business from scratch. In fact, most business owners who start a company from scratch have a hard time breaking away. They rarely take a vacation. In contrast, when you buy a business, you've usually got trained people in place who can run the business even if you are not there. That gives you a chance to sneak in a vacation, spend time with your family members, or work on your business strategy.
- Easier to Get Financing. Good luck getting financing for a new business that you've started from scratch. Financing a company acquisition is much easier because the business has a track record. The lender can review historical financials for the business, a much more reliable measure of future prospects than a startup's pro forma projections based on a bunch of assumptions.
The key factors in deciding which way to go on this question -- buying a business versus starting a business -- should always center on risk reduction and business prospects.
Start by making the choice that you feel will have the least possible risk of business failure. At the same time, you also have to have an eye to the future and consider business prospects. Which route will put you in a better place five years down the road? Ten years down the road? If you feel that buying a business would compromise your passion for the business and reduce your business prospects in that manner, then by all means don't buy a business.
However, if you do opt to start a business from scratch, recognize that many business experts believe that buying a business is a much better way to get started as an entrepreneur.
Domenic Rinaldi is president and managing partner of Chicagoland Sunbelt, a business brokerage firm that focuses on helping people buy and sell businesses in Chicago and the surrounding Midwest area. Rinaldi is a Certified Business Intermediary (CBI) from the International Business Brokers Association and an expert in the business brokerage field. He brings more than 24 years of experience in merger/acquisition, sales, service, marketing and operations to the business brokerage arena. Domenic can be reached by phone at 773-243-1603.
Want to learn more about this topic? If so, you will enjoy these articles:
Pros and Cons of Buying a Business
Buying a Business to Avoid Trial By Error
Buying a Business to Get Acquisition Capital
Do you agree that it's a safer bet to buy a business than start a company from scratch?