With jobs being as uncertain as they are many people today are giving serious consideration to going into business for themselves. That opens up the basic question of which choice is better?
- Buy an existing business,
- Start a new one from scratch.
There are advantages and disadvantages to doing each. Perhaps which route you choose will have more to do with where you are personally in relation to the business you would like to start.
Why buy an existing business?
Perhaps the single biggest reason for buying an existing business is that you will be acquiring an existing entity with an established cash flow. That single factor takes a lot of the risk out of going into business in the first place. The business will already have an income, which will enable you to pay the expenses of the business and hopefully have a profit for yourself as well. This is one of the main reasons why many people consider buying franchises.
As the owner of an existing business you’ll be able to function more as a manager, working to grow the business as opposed to trying to start from the ground up. You can evaluate which product lines are profitable and improve or expand them. You can decide to eliminate unprofitable lines. You can also take a close look at expenses that can be reduced or eliminated in order to improve profitability. The point is, you’ll be managing a going concern, rather than spending your time banging on doors to a drum up a cash flow.
Another major factor is that you won’t have to speculate as to whether or not the business will be viable. Since it is a going concern, you’ll know that the business can work. It will then just be a matter of matching your skills to the existing business. There’s risk in that too, but not nearly as much as having to establish a cash flow.
On the negative side, buying an existing business can be expensive. It’s sometimes difficult to really know what a business is worth. Once you establish that you will need to make an investment, probably a substantial one, and that will increase your risk in the venture. In addition, even though it has a cash flow, there’s no way to guarantee that flow will continue once you take over.
If you need capital to launch your business, consider checking out Lending Club. They might be able to help you find the cash you need to make your business dream come true.
This can be especially true for a personal service business in which the previous owner was integral to the success of the business. If the existing client base does not react favorably to your ownership of the business, you may have paid good money to buy a declining cash flow that you will have to rebuild.
Why start a new business from scratch?
The primary advantage to starting a business from scratch is that you won’t need nearly as much start up capital or up front in order to do it. Many businesses can be started on a shoestring. You can begin with very little upfront money, and then invest in and grow the business out of its cash flow. This is a lower risk way to start a business, though it does take considerably longer than if you have an existing cash flow from established business.
If the business will be new, you’ll be able to build it exactly the way you want it to be. You may decide that you don’t want to take on certain expensive services and that can make the business more profitable from the start. And since many acquired businesses are purchased with debt, the business can be all the more profitable because you don’t have acquisition debt to service.
The two primary disincentives to build from scratch are the obvious lack of cash flow, and the fact you probably won’t be able to hire people to help with the workload.
The absence of a cash flow will force you to spend most of your time on marketing and sales, and that may mean other aspects of the business will be lacking. Internal functions may have to be done after hours, which will mean that you will have a heavy work schedule. This will continue until you have sufficient cash flow that you can hire others to take on some of his responsibilities.
One possible solution can be outsourcing of internal functions. You could hire individuals to work on single functions, or hire certain services or virtual assistants that can perform some of those tasks for a small fee.
The key to any business is the ability of the owner to generate income
Whether you buy an existing business or build one from scratch, it’s important to realize that the most important factor in the success of a business is the ability of the owner to generate income and run the business successfully. Buying an existing business will make this easier at the outset, but it will never eliminate the need for the owner to have those talents and skills.
A business has to run on the ability of the owner to generate revenue. Absent that ability there is no point buying or starting a business until that ability is proven. One advantage of starting a business from scratch is that you can develop that ability without having a lot of capital at risk. When you buy an existing business your capital will be at risk if you need to learn on the job. If you fail to learn what you need to, your capital investment may be lost.
In the end, whether to buy an existing business or build one from scratch may depend on a) the type of business it is, and b) the talent that you bring to the business. For example, a dentist buying an established dental practice may be a fairly low risk investment. On the other hand, buying a restaurant when you have no experience in that business will have enormous risk.
It may be best then to build a business from scratch if you are new to that business. By doing that you’ll learn the business gradually and take it from zero to profitability mostly through your own efforts. You will have proven that you can handle business. Buying an existing business should perhaps be reserved until you have demonstrated that capability.
But that’s just my opinion. What do you think? If you are thinking about going into business for yourself, or might in the future, will you be buying an existing business or would you start from scratch*?