Buy an Existing Business – Pros and Cons

Bill Henthorn asked:

The cost of a new business vs. an existing one

Starting a business from scratch is usually far less expensive than buying an existing business. This is the biggest factor between these two choices. There are many reasons to buy an existing business. If money is not a limiting factor, then buying a business that is successful makes more sense that starting one from the get-go. One of the most important reasons for buying an existing company is they are established and the company has a monthly cash flow. The existing business enjoys a following of customers, which means immediate money coming in through the cash register. This one fact helps to offset the higher cost of an existing business vs. starting one up. Another factor is a new business has to do a great deal of advertising to let a potential customer know they are open and where they are located. The existing business does not need to do this kind of advertising.

Success chances of a new business vs. an existing business

A new start up business is far more likely to fail than an existing business with a successful history. The reason for failure in most cases is lack of cash flow and gross under financing. An existing business will have cash flow and a customer base, which will allow it to survive. A new start up business has neither of these critical elements. In addition the start up in many cases has little ready cash for waiting out the start up period and all of the expenses of getting a new business off the ground.

Given a choice, purchasing an existing business is far more likely to be the better investment. A start up while attractive due to lower beginning investment has a greater chance of failure. These considerations should be taken into account by a person looking to own a business

Reasons not to go with an existing business

A startup business is less expensive than buying a business that is up and running. When you buy a company that has been around for a while, you assume the reputation of the business. You will have to live with the good will it has generated over time. If the good will has been slipping, then be prepared to spend some money letting the public know the company is under new management. In any event it is good to let the world know that new people are running the company. If your idea for the business is an offshoot of the current business, then you may or may not be better off starting fresh with a new company. If your business plan fits with the existing company then that should be the way to go. If they are contrasting or completely incompatible then a new start up is the way to own you new business life. Do not let your ego get in the way and lead you into a start up situation. There is absolutely no reason to feel that an existing business is less brave.

A reason for buying an existing business is you may be able to get the old owner to help you learn the ropes if it is a new experience. Many owners of startups are fearful they might fail at running a business so they try to take the less expensive way to try managing a company. This is not a valid reason but somewhat of a cop out.

Which situation will cost more in advertising dollars

A start up will need a great deal of early publicity to attract customers to the business. This is required as the location, the name and what you are doing is not known when you first open your doors. This type of advertising is far different than what you would do with an existing successful company. You might want to show the public that new management has taken over the existing company.

A new company that never existed before will need to spend money on TV, radio and newspaper ads to attract customers to the new establishment. They will have to repeat the ads in order to get their message across so the customer will give them a try. In some ways this expense could be considered part of the initial cost of the new business.

New business employees

An existing business will have employees who know their job and are very likely to be responsible for the overall success of the business. Any company is only as good as the people who work for it. A successful business has gone through the shake out period of finding good employees. A start up business needs to find employees and this takes time to develop a good staff. This adds another critical factor to the start up time of the first year or so. A new owner cannot do everything by himself or herself. They will need help from their family or need to hire it in. If the business is new to the new owner as far as experience, this start up time also requires a very quick learning curve.

Customer base

The customer base has to reach critical mass in order for the business to grow and stay successful. An existing business will have developed a base of customers. A new start up has very few customers when the doors are first opened. The problems for both situations are different and need to be addressed. An existing company will need to maintain its existing customers and then try to add to that number. As long as the standards that allowed the company to get where it is are continued, the base should remain stable. If there is a fall off in the work or treatment, the customer base could begin to erode. This is not uncommon when a new inexperienced owner takes charge. The wise new owner will make every effort to not let this happen. A start up business has no base and needs to grow one as quickly as possible. A sizable customer base will automatically generate cash flow for the company.

Without this luxury, a new business must get new customers the hard way, one at a time. There are very few referrals in a start up business’s early months. This is a significant difference between an existing business and a start up business. The new owner of an existing business would be wise to spend the time on meeting all of the important customers of the company. If the old owner would take the time to make the introductions, that would be even better.

Conclusions

If money is not a consideration, then an existing business is the way to go. The odds are definitely in the favor of new owner of an existing business. The start up is the way for a less financed person to own a business. It will be more difficult to make a go of it, but it can be done. A good idea and a great deal of hard work can make it successful. Study your situation and compare the pluses and minuses for a business that you want to own. If you cannot find one for sale on favorable terms then you may be forced to start from scratch. In either case, you will end up with a different kind of boss. The boss will be you.

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