Buying a business VS Starting one
Buying a business has been deemed to be more cost-effective than starting your own business. There is, however, always an exception to every rule. Starting a business from scratch can cost you less than buying if you know what you are doing and are an expert in your field.
When I wanted to expand my business into manufacturing, I started from scratch with new strategies and business plans and the option of either getting it off the ground or buying a ready-made and existing business model. Although exciting, the thought of starting from scratch was also quite daunting.
I remember being presented with an opportunity to buy an already-established factory that was a turnkey operation.
As an expert in my field and after putting everything down on paper, it became apparent that my better and more cost-effective option was to start from scratch. Yes, I worked harder than I would have if I had bought it, but I laid out less, and the best part was that I sold it 15 years later and capitalised on what I had built from scratch.
But each person’s case is different. Let’s look at some advantages and disadvantages of buying an existing business versus starting a new business.
Advantages of Starting a Business
- Building it from scratch and learning and growing with it has enormous benefits.
- You develop your own goodwill and don’t have to deal with any issues from previous owners.
- Build your team that YOU select and work well with together
- If successful – the ability to sell it is a massive financial benefit and achievement
Disadvantages of Starting a Business
- A quick look at statistics doesn’t paint a great picture of the success of start-ups. Almost half of businesses will fail after four years.
Here are the top 4 reasons why businesses fail. - Requires Capital Investment, and the return may only come once it is profitable. This could take years.
- Higher Risk
- No supplier contracts are in place – therefore, higher prices and no credit terms.
- No steady income
Advantages of Buying a Business
- Financing and loans are more accessible than starting your own business
- Less Risk
- Immediate / Existing cash flow
- Existing Staff who are familiar with the operation
- Proven business model
- Existing goodwill (intangible asset), credibility, trust
- The hard groundwork has been done. Therefore, you can focus on strategies
- Established customer base
- Established Market Share
- Established branding
- Existing Infrastructure, plant, equipment
Disadvantages of Buying a Business
- Outdated Inventory and machinery that require more investment
- Outdated systems and processes that require more investment
- Staff that cannot adapt to change and create problems or walkout
- A bad reputation in the industry and business relationships
- You don’t get to learn and build the business from scratch; therefore, costly decisions may be made purely because of “not knowing what you don’t know.”
Is buying an existing business better than starting one?
It depends.
If you know what you are doing and are an expert in your trade or area of expertise, starting your own business can be more beneficial than buying one. In most cases, however, there are more advantages to buying a business rather than starting from scratch. You are increasing your odds of success because the groundwork has been done, and your job for the first year is to maintain that.
I recommend waiting to make changes until you have worked on it for at least 12 months. A big mistake new owners make is trying to save from what previous owners have done and create higher profits when they can create more damage. Remember, you have bought a profitable business. It is advantageous because of the systems and processes that are in place.
Whichever of the two you choose, you MUST consult with the experts to ensure you have all checks and balances in place. Start with your accountant.
Owning a business has major rewards but also presents many challenges, and you should prepare well for either scenario. Business planning is an absolute must.
Good Luck with your venture!
