The first question on any entrepreneurial journey is a big one. Is it better to buy an existing/operating business or should you choose to start one instead? The short answer? Buying an existing business is typically the better path.
An existing business has a history that you can examine.
If you start a business from the ground up, there is no way to know what the track record will be. If you are fortunate, the record will be good. If you aren’t, you probably won’t be around long. An existing business removes a bit of this risk by having financial records that you can examine closely prior to purchasing the business. An existing business also has a proven location and comes with an already established customer base.
Another plus to getting a business with records? As you go through the numbers you may find new business growth ideas, unused niches or overlooked areas that could be streamlined.
An existing business has cash flow.
New businesses fail when new business owners don’t take into account the period of time, typically 12 to 18 months, between opening the doors and when the business will actually start generating a profit. Many new businesses go under because they have no cash left after getting to the grand opening – they end up running on fumes and having to shut the doors before anyone even knows the business is there.
An existing business is already generating income. Even if you will need to find financing for operating expenses, there is no need to guess how much money you will need and how much you will be able to pay back because you already know what cash flow the business currently generates.
An existing business comes with someone to show you the ropes.
When an existing business is sold, there is usually a training and/or consulting period written into the contract. This ensures that the new owner gets the proper training to keep the business up and running.
If you start your own business, you will be going it alone. Although there might be business owners who are willing to give you advice, you won’t have someone to show you exactly what works (and more importantly what doesn’t work) for those critical first few weeks of ownership.
It is typically easier to get financing for an existing business.
It is fairly common in the sale of small businesses that the owner will offer seller financing. This is great for a new entrepreneur for two reasons. First, it says a lot about a business that the current owner has enough confidence in the business model to take payments over time. By offering seller financing, they will be dependent on the continued success of the business for years to come. Second, traditional sources of financing can be very hard to come by. For a buyer who can’t pay all cash up front, seller financing allows for the purchase of a business with just a sizable down payment.
For all the reasons above and more, deciding to buy an existing business will likely put you in a profitable position much sooner and with less risk than creating a business from scratch.
Have you ever started a business and wished that you had just bought one that was already established? Do you have questions about the success rates of existing businesses once they change ownership compared with the success rates of start-ups? Ask us! Leave us a comment or question here and we will be happy to help.