12 Pros and Cons of Buying a Business
Buying a business has its perks.
- February 24, 2020
- Small Business Finances
- 8 min read
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You can be an entrepreneur even if you don’t have the temperament for starting a business from the ground up. Instead, you can pursue your entrepreneurial mission by buying an existing business.
When you buy a business that is already established, there can be significant advantages over launching a business from scratch. But every business venture usually comes with pros and cons — and buying an established business is no different. Read on to find out the principal advantages and disadvantages of buying an existing business.
The advantages of buying a business will vary — depending on the business and its circumstances — and are not guaranteed. However, buying an existing business tends to have inherent advantages over starting a new business.
Here are some of the major advantages of buying an existing business:
New businesses and their owners have to wage major uphill battles just to get their company launched. However, if your business is a true startup — meaning it’s an innovative idea with no proven business concept — all these early-stage steps are even more difficult.
When you’re planning to launch a new business, the overwhelming majority of your time and energy will be spent on tedious tasks such as writing a business plan and lining up funding.
When you buy an existing business, however, you acquire both the business as a structure — such as its property, its employees, its vendors or suppliers — and the business as a concept. As a result, you gain the fundamental basis of what makes the business operate, generate revenue and build a customer base. Acquiring a proven business concept can save tons of time, energy and money that would otherwise be spent developing it.
When starting a business from scratch, you’ll have to put in the time for countless preliminary steps — such as purchasing initial inventory, finding suppliers, hiring employees and determining a location — before you can even open your doors to customers.
By contrast, when you purchase an existing business, you can save a lot of time by not having to accomplish so many initial steps. When you buy a company, you tend to gain staff members that are already trained, preexisting relationships with suppliers, established processes and procedures, as well as significant knowledge you can tap into, so you can successfully run your newly acquired business.
That said, you may need to hire additional staff members, change locations or upgrade equipment. But the key thing is that the initial startup time can be significantly reduced, allowing you to jump in and really work on the business and its growth.
Just as you save on startup time when buying a business, you can also save on operating costs. One of the major benefits of buying an established business is that the operating costs are lower.
If you want to open a gym from scratch, for example, your startup costs would include purchasing necessary equipment, hiring staff members and arranging for various services.
With an existing business, however, your initial operating costs are lower because many parts of the business have already been established.
A major area that consumes time and money when starting a business is building a customer base. Gaining a group of loyal customers usually requires significant investment in marketing and marketing strategy, which can be a big drain on resources as you try and launch a new business.
In contrast, when you buy an operating business, you should also acquire an existing customer base, which will continue to make purchases under your ownership.
Securing funding for a new business or startup can be difficult. SBA loans and traditional banks and lenders almost always have stipulations about existing time in business and revenue generation — requirements that a startup business cannot meet.
When you want to buy a business, however, lenders and investors tend to see funding as a lower risk than funding a brand-new company. Their reasoning is understandable since there’s a record of financial performance to measure past business performance and forecast future performance.
Financing the purchase of an existing business can also be easier if you can take advantage of seller financing. In seller financing, the current business owner —the seller — offers the buyer — you — a loan to cover a portion of the cost. Typically, you will make a down payment in cash as soon as the deal is closed. Then, the seller’s loan covers the remaining amount, or a large amount, of the business’s sale price.
You might need to have an additional stream of funding, but seller financing is an option that is simply non-existent when starting a new business from scratch.
Smooth business operations are heavily dependent on having good relations with vendors and suppliers. When you start a brand-new business, you’ll need to build these networks and relationships from the ground up. This usually takes time and energy, especially if you have to try out several different suppliers before you find one that’s the right fit.
When you buy an existing company, however, it will likely already have standing relationships with vendors and other businesses, which will make your job easier. Plus, since these vendors and suppliers have been working with the existing company for some time, they usually know what systems and operations work well and what areas could use some improvement. If you’re launching a startup, however, you’ll have to figure out all these issues and nuances yourself.
Building a reputable brand for your business is a vital task that can mean the difference between failing and succeeding in the long run. A company’s brand is a primary factor in establishing and expanding your customer base, market presence and future prospects.
When you start a new business, you will need to create and develop your brand from scratch — an arduous task that can absorb tons of time and resources and still not pan out. If you buy an existing business, however, you’ll usually inherit the business’s brand and market share, which can save you significant amounts of time and money.
As with most things in life, buying an existing business also carries some drawbacks. When purchasing a business, you may save money in one area compared to launching a business, but then lose out in other areas. It’s important, therefore, to have a full understanding of some of the potential disadvantages you face when you buy a business.
Here’s a look at some notable cons of buying a business:
It’s critical when choosing between starting a business and buying one to work out all the financial issues ahead of time. Depending on the circumstances, the cost to launch a business could actually be cheaper than purchasing one. This is because when buying an existing business, you can save money on operating costs, such as inventory and equipment, but you’ll likely face some hefty purchasing costs.
When you buy a business, you’re buying far more than office space, desks or employees. You’re buying the customer-base, brand, business concept, assets and equipment, intellectual property and much more. All of these inevitably will be built into the price tag of the business, which means the more successful the company, the more you’re likely to pay for it.
When buying an existing business that you didn’t start, the range of aspects you’ll need to become familiar with is enormous. Examples include details of products or services sold, internal processes, employees, relations with suppliers and vendors and the company’s financials. So, make sure to allow significant amounts of time to learn and master the existing business’s inner workings and operations.
When you build a business yourself, however, you create and develop all these features and thus are very familiar with them all.
The advantages of buying an established business — having a team, processes, equipment and suppliers in place — can also sometimes work against you, depending on the circumstances. And as you take over and run the business, you may discover significant issues that you need to resolve. Issues can include staffing problems, out-of-date equipment, undependable suppliers and debt or cash flow issues.
In the process of making changes, there’s a chance that you’ll unintentionally create new problems, like employees resistant to policy changes who then quit. Once again, researching and learning all aspects of the acquired business is necessary to mitigate this potential drawback.
Beware of buying an existing business for a fairly low price. If the current owner is willing to sell his or her company at what seems a marked discount, there’s a risk something is wrong with the business. Such problems could range from external factors, like the company’s product or services being rejected by the market, a declining customer-base or being totally outclassed by competitors.
As a prospective business buyer, you’ll also go through a fairly intensive due diligence process, where you’ll gather information about the business and the current owner. But no matter how much information you uncover, you always run the risk of taking on issues you’re not aware of — or that are worse than you first thought. For example, equipment could be damaged, or the brand might have a bad reputation. Once you buy a business, however, you buy those issues, like it or not.
Read Next: 15 Entrepreneurs on Their Biggest Fears
The existing structure of the business you buy can both work for and against you. For example, it can be great to inherit a competent team, which efficiently follows established internal processes, but you could also acquire an incompetent and inefficient team.
Another major issue concerns company equipment. Taking on existing equipment should be a perk, not a drawback. Therefore, it’s essential you do your due diligence by testing machinery and equipment during the buying phase — not after.
Also, make sure you investigate whether the business you’re acquiring owns the equipment or leases it. The latter could come as a frustrating surprise if you assumed the company owned its equipment.
Overall, if technology, processes or operations seem outdated and need to be replaced or reworked, you’ll need to factor this into the overall cost of the business. Unfortunately, if you find that existing outdated systems are too ingrained, you could have an expensive problem on your hands in eliminating them.
The Other Side: How To Sell a Business
Perhaps the most important part of buying a business is for you to do your due diligence. Research all facets of your target business, from financials like its balance sheet, cash flow statement and tax returns, to the human elements, such as the existing staff, their well-being and how they work together. Understand all the assets and liabilities the business has on hand, as well as more intangible aspects like the business’s brand image and reputation.
Unfortunately, it’s very unlikely that you’ll find an existing business for sale that’s completely problem-free. But with a clear and thorough understanding of the pros and cons of the business you’re interested in, you’ll be able to make an informed buying decision.
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