Module 2: Are you torn between the decision to start your own business from scratch or buying a business? Do you want to know which of this move is the best? Then I advice you read on.
Virtually all entrepreneurs know that there are different ways to venture into a business. And the two primary options are starting a new business from scratch or buying an existing one. Most of the time, entrepreneurs are confused as to which option to choose. But the truth is, each path his its own fair share of advantages and disadvantages.
This article discusses how starting up compares with buying an existing business. We will start with a general discussion on the advantages and disadvantages of each option before comparing them based on certain specific criteria.
The Pros and Cons of Buying a Business Vs. Starting your Own Business
Starting a Business
While starting a new business from scratch can be very rewarding, it usually requires an idea or concept that revolves around a unique product, technology, or marketing plan. One of the advantages of this option is that you can start small with minimal upfront pay and then expand to full capacity later on. Another advantage is that you can test your business idea from a small office.
However, you must bear in mind that starting a successful business requires much more than coming upon a business idea and implementing it. It involves researching the idea for profitability and other factors. It often turns out that business ideas that make sense initially, do not after a detailed investigation. There may be little or no demand for that business idea you are getting crazy about, or the competition may be so fierce that starting the business would mean fighting a lost battle.
As alluring as it may sound, starting a new business comes with a number of disadvantages. You will need to attract customers, which usually requires a lot of time and effort. And you will have to support the business with your personal savings because there may be little or no profits for the first few months or years. In addition, obtaining startup funding is usually very difficult because no one wants to invest in a high-risk startup that will most likely fail (yes, most startups fail).
Buying a Business
This may sound like a better option and can be a more effective way to own a business, but it is usually much more expensive than starting up. Of course, the owner of an existing business will expect you to pay for all the effort that had gone into building a huge base of loyal customers, establishing the business and brand, staying ahead of competition, hiring and training employees, and overcoming various market challenges.
Buying an existing business has many advantages. Financial institutions will readily grant you the needed financing to acquire an existing business because it already has an establish history, assets, and proven ideas. And the risks associated with buying an existing business are very minimal, since they already have well-trained employees, an existing customer base, operating processes, a known location, and an existing cash flow.
On the other hand, buying a business comes with few disadvantages, one of which are the contingent liabilities associated with buying a new business. However, you can protect yourself from these liabilities by structuring the transaction as an asset purchase.
Now, let’s compare starting a new business with buying an existing one based on certain criteria, such as risk factors, rewards, management challenges, and so on.
Risk factors of Buying a Business Vs. Starting Your Own Business
Starting a business usually involves huge risk, and most startups fail. And this is because a start-up entrepreneur will have to deal with many unknowns, such as whether customers will buy the products and services, and whether the business will be profitable in the long term.
On the other hand, however, an existing business has a reputation in the marketplace and a large number of loyal customers. So, the only challenge lies in building upon what has been accomplished already.
Valuation Issues of Buying a Business
Every good decision you make with a startup creates value in the business. However, when you are buying an existing business, you are paying for already created value. How much you will pay for the business depends on your evaluation of the company’s potential as well as its past records.
Concealed Problems Associated with Buying a Business
Certain market realities may be hidden to an entrepreneur while starting a new business. Similarly, even the due diligence may fail to reveal certain difficulties that an existing business may likely face, such as the emergence of new competitors. But if experienced professionals are involved in the due diligence process, most of these likely problems will be detected.
Management Challenges Associated with Buying a Business
When you are starting a new business, you will be responsible for selecting the best individuals to join your team. But when you buy a business, you inherit the people already in place, and it takes a time to weed out the poor performers (if there are any). Employees may not get on well with the new owner. And the new owner may encounter resistance to change, since there are existing policies, procedures, and a corporate culture.
Rewards of Buying a Business Vs. Starting a Business from Scratch
Start-up companies usually go through a painful period during which they only spend money without earning any in return. These funds go into marketing and other costs. It takes time for the profits to start coming. But when you buy a business, the financial rewards begin right after the transaction closes, since the business is highly profitable and is already generating cash flow.
The advantages of buying an existing business far outweigh the challenges. So, paying the extra costs for an already-established business is far better than facing the risks of starting a new business from scratch. However, I want you to know that the true test of being an entrepreneur is in starting and building your own business from scratch. This is where the most reward lies, that is if only you succeed.