You’re over it, all of it—the job, your career, the nine-to-five routine, the morning commute, the cubicle in the corner—you want to ditch it all and finally start your own business.
You’ve already decided what that business will be, and now you’re setting down to consider the details of how you’ll get it off the ground. There’s a major choice to be made: buy an existing business, or build your own from scratch.
Which route will you choose?
The advantages and disadvantages of buying a business
Because of the required upfront investment, both the rewards and risks of owning the business will be substantially greater if you buy an existing business. Each will need to be carefully considered to determine if this is the right path, and you can probably come up with a few more of your own.
Advantages of buying an existing business:
- You’ll be taking over a business that’s already a going concern; a ramp up period will be completely unnecessary
- Most of what you’re buying when you buy an existing business is the cash flow, which is the single biggest component in the success of any business
- There’s no speculation as to the viability of an existing business—it’s a going concern and the results of operations are already known
- You can spend your time improving management, work flows and sales, rather on setting up the business and developing cash flow from scratch
- A built-in customer base can provide a ready market for parallel product lines
- You can take advantage of the expertise of existing employees, or even of the previous owner(s) if they agree to stay on as employees during the transition
Disadvantages of buying an existing business:
- Buying an existing business can be costly, often involving both substantial cash up front plus a note for the balance
- If all of your capital is tied up in the purchase of the business, there may be little available if unforeseen problems or cash flow issues develop
- Though the business has a cash flow, you’re risking—with your own money—that you have the expertise to at least maintain it, if not grow it
- With the change in ownership, existing employees and vendors may not stay with you; none are bound by a purchase contract
- If the business you’re buying is a service business, there might be no way to accurately determine how much of it was based on the previous owners skills, personality or connections—the cash flow could dry up quickly once he or she is gone
- If the business fails, you’ll be out your down payment, and you may still be on the hook for any funds borrowed on your home, retirement plans, credit cards or from relatives
Clearly the advantages of buying a business can lift you to new heights, just as the disadvantages can land you in the poor house!
The advantages and disadvantages of building a brand new business
This may be the natural choice for most would-be business owners, if only because it doesn’t require the huge up front investment.
Advantages of building a completely new business:
- You can usually enter start ups with little or no money up front, especially if you’re going into a service business
- The success of the business will rely entirely on your skills and abilities, rather than on an injection of capital or on the skills of an owner who’s no longer there
- Since the business is an upstart, you can work at it gradually while still maintaining other sources of income
- The business will be customized to your desires; there won’t be any risk of running off existing employees, vendors or customers
- Building your own business from a cold start will force you to be resourceful; you may find ways to run your business with subcontractors and product sources that will eliminate the need for employees, building space and equipment—all major costs
- Should the business fail, you can walk away without having lost a large investment, or being stuck with holdover debts from a business that no longer exists
Disadvantages of building a completely new business:
- No cash flow will mean you’ll have to spend most of your time in the beginning building a customer base
- You’ll have to build the business relationships, product lines and workflows to enable you to service your customers—once you have them
- Being the new kid on the block can, in and of itself, be an obstacle to customers; many don’t want to deal with an upstart business
- You’ll probably have to be chief cook and bottle washer, at least until a steady cash flow is established, which will make it easy to get caught up in working on details that won’t put any money in your pocket
- The business will be entirely dependent on your abilities; if they’re deficient, you’ll find out right away and there may not be anyone else to rely on
- You’ll be working alone which can be tough if you’ve never done it before; there’ll be no one to be accountable to and motivation will be a constant struggle
Here we have largely the same situation as with buying an existing business—the outcome can go either way. The risks will be substantially lower than buying an existing business, but at the same time there will be less certainty of your success.
Which is the better way to start a business?
I don’t think one way is better than another as a general rule. It may come down to your skill sets and money situation more than anything else. If you have cash for the upfront investment, and a strong set of management skills, buying an existing business may be the better choice.
On the other hand, if you don’t have the upfront cash to buy a business, but you have strong sales skills and an aptitude for business you want to enter, starting from the ground up may produce better results—at substantially less risk.
What are your thoughts? Are you thinking of starting a business? Or if you already have a business, which route did you choose? Can you offer advice to anyone else? There are no right or wrong answers here, so have fun with it!