Should You Buy or Start From Scratch A Guide For Prospective Business Owners

Should You Buy or Start From Scratch? A Guide For Prospective Business Owners

The past couple of years have changed the local business landscape, with many small business owners shuttering their businesses for various reasons. It goes without saying that running a small business is not a job for the faint of heart given the long hours, challenges requiring a large toolbox of business skills, and unexpected expenses. At the same time, owning your own business can provide a great sense of satisfaction and freedom, as well as the ability to chart your own course and follow your dreams of living life on your own terms. 

In previous articles, we discussed the process of starting a new business from scratch. While the idea of custom-building your own business from the ground up is exciting, there’s another option to consider: buying an already-established business or franchise. This comes with a list of pros and cons, so as a prospective business owner you’ll need to evaluate what’s best for you. 

A few pros of buying an existing business: 

  • Established companies may have better financing options: banks are more likely to provide good terms for existing businesses, which are seen as less risky.
  • Existing licensing and permits: transferring ownership requires fewer hoops to jump through than starting from scratch. 
  • Existing customer base: Existing brand loyalty can translate into lower marketing costs and a steady cash flow. Current customers may have set expectations regarding the company’s offerings, but they will also be interested in potential new developments under new ownership. By invigorating the business and adding a fresh perspective, new owners can potentially increase sales and profit. 
  • Established supply chain: It’s easier to continue pre-existing relationships with vendors and other partners that are already familiar with a company than to seek out and build new business relationships as a new company grows. 
  • A trained staff and proven operations: A qualified, trained workforce familiar with routine operations can help the business transition smoothly under new ownership. In addition, an existing business will already have systems in place to track finances, inventory, and sales. Starting from scratch means spending extra time and money to develop these processes. 
  • Lower operating costs: Despite a higher initial outlay of money to purchase an existing business, the startup costs are already taken care of and the equipment and employees are already in place. 
  • Greater likelihood of success: According to the Small Business Administration, 80% of small businesses survive their first year, and one in 12 of all small businesses close each year. If a business has survived its first five years or more, the odds are good that it will remain successful. 

The potential downsides: 

  • High initial investment cost: Buying a new business often costs more initially than starting a new one, and highly profitable established businesses will likely cost morethan those involving more risk or which are in need of updates. A brand new business provides the option of starting small and growing slowly over time.
  • Existing company reputation and culture: If the existing business has bad online reviews, new management will have to work extra hard to rebuild its reputation. It may also be necessary to keep prices low in order to compete. Consider the effort necessary to reshape the company’s image. 
  • Outdated technology: If the business is still running Windows XP throughout, for instance, you’ll need to consider the cost necessary to upgrade the equipment to fit your company’s needs. 

There are several considerations when looking at existing business opportunities. First, what kind of business do you want? Consider the personal commitment required and how it will differ from your current job situation. If you’re new to business ownership, a franchise will offer more support and guidance, with set policies and procedures. Also, if the business you’re considering requires a skill set you haven’t already developed, consider the effort it will take to get up to speed with training and education. 

Second, why is the owner selling? Are they retiring, switching careers, or is it just too much to handle? It may be helpful to discuss with the current owners how much time they’re investing in the business so you can determine how much commitment is required on a daily basis. 

It’s also important to thoroughly investigate the business’s financial condition so as not to have any unpleasant surprises after signing the papers. Enlist financial professionals to examine the company’s asset values, revenue streams, and cash flow projections. Tax professionals can also make recommendations about the purchase and reorganization of the business into a more favorable structure. 

Ready to look for business opportunities? Websites like BizBuySell or LoopNet can help you find existing companies or franchise opportunities in your location of choice and provide key information such as business owners’ reason for selling, gross revenue, cash flow, and number of employees. 

The above websites are essentially the commercial business version of residential real estate websites like Redfin or Realtor.com, featuring listings from multiple agencies. You can also go directly to a local business broker such as Sunbelt Business Brokers of North Alabama and Alliant Capital Advisors, which will provide additional insight into businesses of interest. 

With due diligence, you can minimize risk and maximize the benefits of buying an existing business. Ultimately, the decision of whether to buy a turnkey business or to start from scratch is up to your specific objectives, needs, and desires. Adventure awaits–to paraphrase Connor Knapp of Piper & Leaf, the first step is the scariest–very few rewards come without risk, and if you don’t take that leap of faith you’ll never know what’s possible.

Cover image provided by www.bizbuysell.com

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