What are the benefits of buying a business instead of starting one?
There are certainly pros and cons to both buying and starting a business. The risk factors may favor purchasing an existing business.
According to Michael Gerber, author of The E-Myth Revisited, 40 percent of new businesses fail in the first year and 80 percent fail within five years. On the other hand, purchasing an existing business reduces an entrepreneur’s risk. There are a number of reasons to consider in purchase an existing business rather than starting one:
- Proven Concept. As a buyer you already know the process or concept works and this is validated during your due diligence. Financing a purchase is often easier than securing funding for a start-up business for that very reason—the business has a track record.
- Brand. You’re buying a brand name. The on-going benefits of any marketing or networking the prior owner has done will transfer to you. When you have an established name in the business community, it’s easier to place cold calls and attract new business than with an unproven start up.
- Relationships. With the purchase of an existing business, you will also be buying an existing customer base and vendor base that took years to build. It is not uncommon and often preferred for the seller to stay on and transition the business for a short time and transfer those relationships to the buyer.
- Focus. When you buy a business, you can start working immediately and focus on improving and growing the business. The seller has already laid the foundation and taken care of the time-consuming, tedious start up work. Alternatively, starting a new business means spending a lot of time and money on basic items like computers, telephones, furniture and developing policies that don’t directly generate cash flow.
- People. In an acquisition, one of the most valuable and important assets you’re buying is the people. It took the seller time to find those employees, develop them and assimilate them into the company culture. With the right team in place, you may have an easier time implementing your strategies. Plus, with trained people in place you will have more liberty to take vacation, spend time with family, or work on other business ventures. When start-up owners and independent contractors go on vacation, the business goes too.
- Cash Flow. Typically, a sale is structured so you can cover the debt service, take a reasonable salary, and have some left over to take the business to the next level.
Becoming your own boss always involves a risk. When you buy a business, you take a calculated risk that eliminates a lot of the pitfalls and potential for failure that come with a start up.
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