Entrepreneurs have two options as it pertains to owning a company. They can start from scratch and build their business from the ground up or they can acquire an existing company. This review for prospective business buyers discusses the decision-making process to determine which of these two options is best for you.
Buying a Business vs. Starting a New Business: Which is Better?
First, let us take a quick look at the pros and cons of both options before we discuss the decision-making process.
Buying an Established Business
There are significant advantages to buying an established company. Of course, the benefits depend on the company you purchase; a successful business with excellent profitability and a unique competitive advantage is likely to provide a much better starting point than a company that has declined in recent years. However, in general, the benefits of buying an established business include:
- An established customer base
- Business processes and infrastructure that is already in place
- An established brand and reputation
- Established customers and business partners
- Proven track record of financial performance
- An existing workforce that is already trained and understands company processes
- The ability to focus on growth and expansion opportunities(rather than starting from scratch)
- Reduced risk relative to the risk involved with starting a new business
Of course, the drawback to buying your own business is a higher start-up cost. It usually takes a significant investment and/or the assistance from business partners, investors, or financing companies. However, overall, the risk is typically much less when purchasing a company, and the buyer can expect to have more available time than they otherwise would when starting their own company from scratch.
Starting Your Own Business
Starting your own business may be the best choice in certain situations. Specifically, if you are unable to obtain the financing necessary to purchase a company and are able and willing to invest the necessary time it takes to build a company on a more limited budget, then it may be best to start from scratch. Specifically, the benefits of starting your own business include:
- A lower cost to enter your entry (relative to buying a company)
- Personalize your goods and services according to what you do best
- The opportunity to create your own brand
- The ability to hire your own staff without firing employees
- Flexibility to create your own processes without making changes
There are also notable drawbacks to starting a business rather than buying your own business. In particular, starting a business comes at a much greater risk. The extent of the risk depends on your industry. However, 20% of new businesses fail during the first two years, approximately half fail during the first five years, and 65% fail during the first 10 years. Only one-quarter of new businesses make it to 15 years or more.
Step 1: Conduct Industry Research
You likely already know the industry you would like to enter. This should ideally be an industry in which you have knowledge and experience. Once you decide on your industry, you should consider the following during the research phase.
Consider The Industry’s Market Trends
First and foremost, you should determine if the industry is a good one to enter. For example, it may not be ideal to enter an industry that is not performing well and has a high level of competition. On the other hand, it may be a great idea to enter an industry that is performing well and shows excellent growth projections.
Consider The Industry’s Barrier to Entry
You should also consider the difficulty to enter the industry. For example, one sector may have a low startup cost that makes it ideal for starting your own company. In other cases, it may be more advantageous and less risky to purchase an established company. To determine the barrier to entry, ask the following questions:
- What is the initial investment required to enter the industry?
- What are the costs of production for the industry?
- What is the level of technological expertise required to enter the industry?
- Are there any regulatory or legal barriers to entry, such as licensing requirements or patents?
- How difficult is it for smaller companies to compete with larger companies within the industry?
- What is the level of brand recognition or reputation required to compete in the industry?
- How difficult is it to obtain financing to enter the industry?
Answering these questions should provide more clarity on if you should buy your own business. If there is a high barrier to entry, then this means that it is likely best to purchase an existing company that already has shown that it is able to sustain profits and that has growth potential.
Consider Your Knowledge of The Industry
You should know the industry very well before you purchase or begin a start-up business. This is especially the case for industries that require a fair amount of advanced skills or have licensing requirements. Your knowledge and experience of the industry can also help guide you to make the right decision as to whether you should buy your own business or start from scratch.
Step 2: Establish Your Financial and Personal Goals
Your financial and personal goals are also important considerations. For instance, starting a new business requires countless hours and substantial (and riskier) financial investments to see growth. If you prefer a lighter work schedule and more certainty financially, then purchasing an established company may be the best option. Although purchasing a company may still require a fair amount of work, the amount of time you need to invest is likely far less if the company has established work processes and a successful business model already in place.
Step 3: Determine Your Investment Budget
Of course, purchasing your own business requires a significant initial investment. This could be in the form of a one-time direct payment or you can seek financing options. Notably, several financing options to consider include:
- Personal savings – Of course, this is an excellent first option if you have saved money that is not designated for other purposes (i.e. college fund)
- Loan from a financial institution – Some banks (and other financial institutions) are willing to provide business loans that allow you to acquire a business. The industry and your creditworthiness play an integral role in if (and how much) financing you receive
- Seller financing – In some cases, the seller may be willing to finance the sale, allowing you to make smaller payments over time
- Business partners or investors – We discuss this in more detail below. However, in short, a business partner or investors can help increase your budget
It is essential to understand how much a business within your industry costs. It also helps to work closely with a business broker to ensure you understand the potential of companies you consider purchasing. Ultimately, you will need to decide if you are able to invest enough to purchase a company. If not, then it may be best to find business partners before you buy (see below).
Step 4: Consider The Path (and Risks) of Starting Your Own Business
As mentioned, the majority of businesses fail within 10 years. For some industries, the failure rate is even higher. You should understand the risks involved with starting your own company if you are considering doing so. You should also consider the path to success if you choose to start your own company. In most cases, success with a start-up involves a significant time and financial investment over the course of multiple years.
Step 5: Consider Adding Business Partners
Adding a business partner (or several investment partners) is a great way to minimize your risk when buying a business. It can also help ensure you are not overwhelmed by the stressful processes that are often involved with taking over an established company with detailed work processes.
Step 6: Discuss All Options With Your Family
Of course, you should always discuss your options with your family members and anyone else who may be impacted by your decision. As discussed, there are pros and cons to buying a business and starting a new company. Seeking input from your family members can help you make the most informed decision possible and ensure everyone is on board and prepared for the next step in your family’s journey.
Step 7: Make a Final Decision
Lastly, after industry research, establishing your goals, determining your investment budget, and discussing all options with your family and business partners, you can make a decision. Be confident with your decision. If you choose to buy your own business, then you can start the process by contacting a business broker with experience in your industry.
Are You Considering Buying a Business?
Sigma Mergers and Acquisitions help individuals who are interested in acquiring a business. Specifically, we make the process easy for the buyer, ensuring they get the most for their investment and are able to take over a company that is right for them. If you are considering selling and need assistance with the decision-making and buying process, then contact us today.