Is buying an existing business a viable option, rather then starting from scratch?
This is the question that every person thinking of kicking off their own business should consider before committing their efforts to starting something brand new.
While there is limited evidence on the exact reasons for a large percentage of small businesses to “fail”, it is widely accepted that business failures are highest in the first 2-3 years of the startup phase, with the probability of failure reducing from then on.
Some of the reasons for the improvement in survival rates over time are:
- Found a market for its products or services
- Established a customer base
- Developed relationships with suppliers and customers
- Core business processes in place for day to day operations
- Growing goodwill and market reputation
- Established profitability and cash flows
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So it stands to reason that if most (if not all) of these factors were already taken into account in a business for sale similar to one you were thinking of starting, doesn’t it make sense to explore that one first, given the hard set-up graft has been done already? Assuming the current business owner is collecting some money for their efforts, so then is it not also a bonus to walk into a business making money as opposed to not getting paid for some time?
Let’s have a look at the pros and cons of buying an existing business vs. starting from scratch:
|Higher “start-up” $ Outlay||Lower “start-up” $ Outlay|
|Systems Developed||Systems to be Developed|
|Trading History||No Trading History|
|Sales Pipeline||Sales Pipeline to be developed|
|Funding may be secured||Own Kitty plus Friends, Families and Fools|
|Profitable history||Need time to reach profitability|
|Employees in place||Recruitment of employees|
|Immediate Cashflow||No Cashflow|
|Established Suppliers||Untested suppliers|
|Existing lease/premise||New lease/premise|
In addition, there’s the unspoken factors not factored in, including:
- Time and effort in planning
- Pilot of products/services
- Equipment purchase and setup
- Premises fit-out
- Obtain/apply for licences, accreditation
- Time to breakeven
- Lost of income (for owner) – not only are you not making any, you have to chip into what you already have
- The list goes on
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Many people think that the typical small businesses offered for sale are those such as cafes and other food or retail outlets, however almost all types of businesses do come up for sale at some point in time. There is of course the option of tapping an existing business owner on the shoulder and ask them to consider thinking about selling.
Based on the above, I strongly encourage you not to make a decision about starting a business until you have investigated the market to see if there are businesses available within the areas that you are interested in. If yes, this will enable you to “jump” into a revenue-generating business and leverage off the hard work already undertaken by someone else.
Unless you are looking at selling something unique into the market place, or you have previous experience to take a start-up business to a stage where it is profitable in a short time frame, buying an established business will generally be more instant, attractive and financially rewarding.
As noted, whilst there are obvious benefits for buying a business compared to starting one, I find unfortunately up to 90 per cent of potential business buyers did not end up buying a business.
Tell us, have you ever owned a business? What was it? How long was it profitable?