Owning your own business can be highly rewarding, both financially and personally. But not every potential small business owner is the same. We all have different motivations for owning a business and what suits one person is an uncomfortable fit for another. So when it comes to deciding whether to start a small business from scratch, or invest in an established business, there’s no clear one answer. But there are many considerations that need to be made in determining whether you should buy or start your own business.
There are some severe pros and cons with both starting or buying a business.
What are the benefits of buying a pre-existing business?
- You enter the business with an established client/customer base.
- The business will already be equipped with all of the machinery and tools required.
- A pre-existing stock inventory will already be in place.
- Premises for the business have been found already.
- It may be easier getting a loan to purchase the building, with the business having an established track record that can be used as evidence of the business’ viability.
- In situations where there are staff already working for the business, it means you don’t need to hire a staff. Furthermore, the staff will already be familiar with the processes already in place for the business, as well as a pre-existing relationship with clients/customers.
What are the drawbacks of buying a pre-existing business?
- Existing staff or customers may approach their relationship with you with negativity, based on their relationship with the previous owners.
Any pre-existing contracts (such as those with suppliers) will need to continue to be honoured.
- It will take some time to infuse the business with your own personality.
When purchasing a business, there are many things you need to consider to ensure that you aren’t buying a business with insurmountable problems. After all, the business is being sold for a reason and if the business is in strife, the owner may have concocted a false story surrounding their reasons for selling.
Before just taking the owner at their word, it is in your interest to conduct some research and ask people within the industry about the purchase. Contact industry associations to get their thoughts on the purchase, speak to the business’ suppliers, and the staff in the business. Be as informed as possible from a variety of sources.
In vetting the business you are looking to investigate as many aspects of the business as possible:
Vendor – Are the reasons for the sale entirely as you have been led to believe? Does the owner just want to do something else with their time, or is there an ulterior motive?
Costs – Has the current owners bookkeeping reflected all of the costs involved with the business? Are there seasonal variables, or increases expected in the future? Are there any hidden or unexpected staff costs?
Financial Reports – Do the financials actually match what you’ve been told? Is the business currently profitable and is that a regular financial state for the business? Are all the required taxes and rates being paid for the business?
Sales – Is the business operating at full sales potential? Are there any trends you can identify and build upon to make the business more profitable in future?
Assets – Does the business have any assets, whether that be property, equipment, intellectual property, or other? Are there leasing arrangements currently in place? And if so, what are the agreements?
Legals – What is the existing business structure currently in place and will that change once you take ownership? Does the existing business meet all legal obligations?
The ultimate benefit of purchasing an established business is that it reduces the number of risky elements away from your investment. As long as you have conducted due diligence on the business you are looking to purchase, you will have an understanding as to how the business can perform and implement any changes that you believe will improve the prosperity for the business.
For other potential business owners, the opportunity to build the business from the ground up is part of the appeal of launching. This approach, too, has its own positives and negatives.
What are the positives of building a business from scratch?
- Everything about the business will reflect the choices that you have made – from the general look and feel of your business, to its processes, marketing plan, and the products/services you offer.
- All of the staff hiring decisions are made by you, giving you a complete clean slate.
- There is no pre-existing negative sentiment to your business from the marketplace – all of the relationships formed will be based on actions you have taken.
- The equipment needed to run the business will have been selected from you, based on the needs and budgetary requirements you have established.
What are the negatives of starting a business from scratch?
- The business is unproven, meaning it may be more difficult to get a loan.
- You will need to build a client/customer base from the ground-up.
- A brand new marketing plan will need to be established and put into place to build awareness of the business.
- You will need to establish and build all of your online communications channels from scratch – the website, social media, etc.
- Not only will you need to fit out the space that you are operating from, but you will also need to purchase or lease all of the equipment needed to run the business.
Determining whether you should buy a business or build it from scratch is a decision that reflects your own intentions in being a business owner. You must determine what will give you the most pleasure and satisfaction if you are to invest years of your life and your finances into the operation.