You want to own a business – the question is whether it’s better to start up from scratch or buy an existing business. If you have a unique product or service to build a business around, or are following a passion, your choice to start a business may be clear. For an entrepreneur, making a business out of something they love is a thrill and a challenge. A very viable alternative for an entrepreneur, however, is to buy an existing business.
Buying a business is much more straightforward than starting from scratch: you start out on day one with both customers and revenue. You also have many intangibles: systems, employees, and suppliers are in place and the business has a track record and credibility with them. An existing business with a history of success can be financed – even if the history is not so good, the seller may still finance it.
Advantages of Buying an Existing Business:
- Relationships with customers and the business’s “brand” have already been established.
- Quick cash flow from operations and existing inventory and receivables – start-ups can take months or years to produce positive cash flow.
- Operations can start immediately – in fact, they just continue.
- Employees are trained and in place.
- Suppliers have already been located and relationships with them established.
- Financing is easier to obtain because the business has a track record.
- You have a mentor in the former owner, especially if the seller has financed part of the purchase price.
- Buying a business may take out a potential competitor that you would have if you started from scratch.
Although there are many advantages to buying an existing business, there are a number disadvantages and areas where caution must be exercised. It is very important when buying a business to carefully evaluate these areas to be sure you are comfortable with them or deal with them in your purchase agreement.
Disadvantages of Buying an Existing Business:
- Sometimes buying a business is more costly than starting one from scratch.
- There could be problems in the business which may not be apparent until after the sale.
- Inventories, supplies, and equipment may be obsolete.
- Your way of operating or your personality may clash with existing managers and employees.
- Receivables may be uncollectable.