The reasons why buying an existing business is often preferred to starting one comes down to two things: reduced risk and time saving.
These advantages do come at a cost - a financial one. However, in the longer run, the initial outlay for business purchase is usually recovered faster than the costs startups require.
Buying an existing business has reduced risk
Most small businesses fail in the first five years of their existence.
There are many reasons why a business might fail, and there is no guarantee that a business that passes its fifth anniversary will continue in the long term. However, as a rule of thumb, an established business is likely to have mitigated many of the pain points that are reasons for short-term failure.
Buying saves time
Starting a new business takes a lot of time, even if it is well funded.
For example, a business model may need refining before it is particularly profitable. That process of refinement necessarily requires that less successful models are tried and tested first.
By buying an established business, you and any business partners can skip some of the time consuming processes, whether developing the business plan, or finding suppliers, clients and staff.
Advantages of buying an established business over starting one
Proven business model
One of the biggest advantages that buying an existing business offers is the ability to evaluate its proven track record of success or failure during the due diligence process. This allows the buyer to make informed decisions about the longer term viability of the business and in particular, its potential for future growth.
A close inspection of the business model can provide a buyer with insights into what has worked well in the past, and how the business has been able to generate revenue and profits. The model also allows a potential buyer to identify areas for improvement or expansion.
When it comes to acquisition, the buyer can ask the seller for warranties that the information disclosed was correct.
Understanding whether the business is scaleable - whether it can be expanded simply by doing more of the same thing in similar markets that it doesn't already operate in - can be particularly valuable.
Existing cash flow may be able to be used to finance interest payments on loans used to buy the business.
Conversely, the track record may also show failures. These in themselves may not be blockers to the sale. They may be opportunities that a new business owner can resolve, particularly if they relate to internal factors such as poor management or operational inefficiencies.
There is a saying that a seller should always leave opportunities for improvement for a buyer to take.
Existing market share
Any business for sale should have a list of existing customers who have bought from them in the past. A buyer might be able to use this list in some way that a previous owner cannot - for example, selling new products or services to people who have already bought similar products or services in the past.
Even if the buyer changes the business model, selling to the existing customer list can provide immediate revenue and cash flow. Strong cash flow is particularly important if the purchase is partially funded by debt.
An established customer base provides a measure of stability and predictability to the business. The new owner can rely on the repeat customers to generate a steady stream of revenue, which can help offset any risks associated with the business's operations during an ownership transition period.
Lastly, sales records can provide a valuable insight into the business's target market, showing clients' preferences and behaviours, in turn informing future marketing strategies and product offerings.
Established brand and reputation
A business' brand identity is an intangible asset, a piece of intellectual property. It is hard to value, and often owners are reluctant to value it on the business' balance sheet. However, it does have value.
A strong reputation is built on trust, and it can take years to establish. Similarly, creating a new brand identity can be expensive. When a buyer purchases a business with an established brand and reputation, they are essentially buying a shortcut to gaining the trust of potential customers.
Brand recognition and reputation makes selling to new clients easier and helps retain existing ones, creating a significant competitive advantage for the buyer. It usually costs more money to acquire new clients than to retain existing ones. Selling to prior clients saves on marketing costs and allows the business to focus on providing excellent customer service.
The reputation of the business can also help a buyer negotiate better terms with third parties. Established businesses may have long-standing relationships with suppliers and vendors who are willing to offer better pricing and terms to maintain the relationship.
By leveraging a company's reputation, a buyer can hit the ground running and build on the success of the previous owner. Business contacts already exist.
Trained existing employees
Having experienced, trained employees is a significant asset for any small business owner. These employees have a wealth of knowledge and expertise regarding the business, its operations, and its customers that would take a lot of time and effort to develop from scratch. As a result, they can help ensure a smooth transition for the new owner.
Additionally, the current employees may be valuable in maintaining customer and vendor relationships. They can provide valuable insights into the preferences and needs of customers, which in turn allows the business to maintain or grow customer satisfaction and loyalty, and ultimately drive revenue growth.
Existing systems and processes
Having established systems and processes in place brings several advantages.
First, the business should operate efficiently from day one. The buyer can avoid the need for trial and error, which can be time-consuming and costly.
Second, established systems and processes ensure consistency in operations. A buyer can expect the business to deliver consistent quality, regardless of who is working on a particular task or project. A reputation for reliability and dependability ultimately helps to attract and retain clients.
Thirdly, the learning curve for the buyer and their team will be reduced if systems are in place, and particularly if they are documented.
Access to financing
Purchases are often financed using a loan, or an equity investment. Financing covers the purchase price, any working capital requirements, and funding potential growth opportunities. If the business has an established credit history and track record can make it easier for the buyer to obtain financing.
A proven track record of generating cash flow may also make seller financing possible - where the buyer pays some of the price up front, and the rest in instalments over time, perhaps with interest.
Potential for growth
An existing business may have untapped potential for growth.
For example, there may be an opportunity to sell new products or services to prior customers.
The business may also have an established geographic presence but could expand into new markets or regions.
There may be untapped marketing opportunities, such as social media or content marketing, that could be leveraged to increase brand awareness and attract new customers.
These opportunities can be valuable to an entrepreneur who wants to buy a business rather than start one from scratch. By identifying them, the entrepreneur can potentially increase revenue and profitability without having to build a customer base or establish a brand from scratch.
Potential for growth is a selling point when looking to buy an existing business. The current owner can use the business's track record to support an argument for growth opportunities, making it easier for the buyer to obtain financing or attract investment.
Advantages of starting a business yourself
Starting your own business isn’t an easy task, which is a key reason why more individuals are looking to purchase an established one.
Business ownership can be all consuming, and the greatest demands usually come in the earlier years. Obtaining financial help can be more difficult.
Starting a new business does, however, give you plenty of creative freedom and the opportunity to see your startup rise from the ground-up, with the satisfaction of knowing that it’s your hard work and dedication that brought you this success.
Is it worth buying a business?
In a nutshell, you can skip the many of the difficult parts of the process of starting up a business by purchasing one that is established. Some entrepreneurs specialise in the process of starting up, leaving others to continue developing the business beyond the point at which it can no longer be called a start up. Others prefer to grow small businesses. There are advantages and disadvantages whichever path you take.