Starting a Business: Buying an Existing Business or Starting from Scratch
As a business broker, my job is to help people who want to sell their business find the right buyer at the right time. However, I also connect buyers with sellers who are the right fit for them. Sometimes, people ask me if it’s better to start a business from scratch. It’s a fair question and one that requires a closer look. If you’re looking to buy or sell a business, it’s important to have a good understanding of EINs as it can lead you to success quickly.
Of course, there are pros and cons to both approaches. One of the primary concerns, but not the only one, is financing. Other concerns include knowledge, training, control, and responsibility. Let’s take a closer look at each of those.
How Much Money Can You Risk?
The first key is how much money you can risk. Remember, not all new businesses succeed. In fact, according to the SBA, 30% fail in the first two years, 50% in the first five, and 66% in the first ten years. This is true for several reasons, including not investigating the market thoroughly, having a poor business plan or not having one at all, and a failure to understand basic accounting and cash flow.
The advantage then of buying an existing business? The current owner has gone through the early stages of business development and has a plan in place that is working. When you buy a business, you will have help from a business broker doing due diligence to make sure the business is a sound one.
If you start a business on your own, you could potentially lose your entire investment, and if you don’t protect yourself properly, even more. The risk is much lower when buying an existing business. So before choosing to start a business from scratch, ask yourself, how much money can I afford to risk?
What About Financing?
Here is one of the tougher conversations to have with those who want to start a business from scratch, but unless you have a lot of your own money to invest, or you are starting a business that requires very little capital to get going, you will need to look at financing options.
However, it is much easier to finance a business that already exists and has established success and an established reputation. Getting a loan for a startup is much more challenging: you will have to have a good business plan, proof of concept, and also some experience in running a business, preferably in the niche of the company you plan to start.
You may need some of the same experience to get financing for an existing business, but there will already be a business plan in place and an established track record for income. Banks and other more traditional lending methods are much more likely to fund this type of enterprise than a startup.
Work What You Know?
One of the things that keep businesses from succeeding is poor market research, and this is often because the person starting the business has never worked in the field where they want to start a company, and may not know what things affect profit and loss and their position in the market.
To start a business from scratch, you will need to work what you know, something you not only have experience working in but managing. If you buy an existing business, you can often learn a lot about it as you go, and even keep the previous owner on as a consultant for a while if they are willing to do so. This is especially true if they have provided you with some owner financing, as they are vested in your success.
Do You Need Support and Training?
This leads to the next area, which is support and training. If you buy an existing business or even buy a franchise, there are things in place that provide you with some support and training in the transition of the business to you, the new owner.
When you start from scratch, there are some training programs out there about business, even some free ones from the SBA. But you will probably have to pay for some training, and you will have to take the time to learn the industry as well as add to your business acumen.
Your choice depends in part on how much training you already have, how much you need, and whether or not you need ongoing support. The cost in both time and money of that ongoing support can make running your new business and making a profit more difficult.
How Much Control and Responsibility Do You Want?
Lastly, how much control and responsibility do you want when it comes to your business? Think of it this way:
If you start a business from scratch, you have absolute control over branding, marketing, customer retention, finances, and every aspect of that business. After all, it is you who is the one driving those things.
On the flip side, you are responsible for making sure all of those things work as well. You have no brand presence, so you must start building your reputation from scratch, everything from a website and social media to online reviews and other important aspects of digital marketing.
An established business or franchise already has a brand, and they already have established a reputation. They probably even have a customer list or regular customers, a website, social media accounts, and more. These are things you can take over rather than creating them.
On the flip side, those brands have been created by someone else, and customers and clients do look for consistency. You can eventually rebrand the business the way you would like, but that transition will take time. Especially if you purchase a franchise, there will be rules governing how you can use the tools they provide for you.
So when you are starting a business from scratch or buying one, you have to ask yourself the question of control vs. responsibility.
Starting a business from scratch, or even buying an existing one, is a big decision and a huge investment. Weigh all of your options to decide which one is right for you. Considering buying a business? Subscribe to our newsletter or keep your eye on this site for businesses we currently have for sale.
Ready to sell your business? It is our job to make sure your business is ready to sell, that you get the right valuation so you get a fair price, and to match you with the right buyer at the right time. Give us a call at Rogerson Business Services today and see how we can ensure that the sale of your business goes smoothly.
