It’s time to decide. Would you rather make money for somebody else or work for yourself and make your own rules?
This is one of the biggest decisions anyone can make during their career. And it can be equally tricky deciding between establishing your own business and buying an existing company.
It takes hard work and plenty of effort to develop the right idea and gain the funds necessary to become a successful entrepreneur. Many people are keen on the idea but unsure of where to start. This is where the option of buying an existing business comes into the picture.
The correct term for this is ‘entrepreneurship through acquisition’. It can be a viable, profitable alternative for anyone who wants to own their own business but would rather work on an established venture than develop their own from the ground up. But which is your best option?
Here’s all the information you need to make the right choice.
Buying an Existing Business
Buying an existing business offers several advantages that starting your own company might not provide. Smart entrepreneurs who are looking to make an acquisition should search for a business that has remained profitable throughout its lifespan.
This is the type of business that produces a steady and reliable income, as opposed to one that creates media buzz or a brief overnight sensation. A steady business is appealing to both equity investors and bankers as it poses less risk to them, and this is ultimately a great thing for you too!
What Makes a Business a Good Purchase?
There are a couple of factors that make a business a solid choice for acquisition.
Repeat customers are one. A loyal and recurring customer base is crucial to the continued financial viability of a company, regardless of its ownership. Conversely, a quickly expanding customer base does not guarantee their long-term loyalty. Look for businesses that have a large number of loyal customers that return time and again for products and services.
Don’t stop at looking at sales statistics—survey the individual customers as well and figure out if they’re regulars or fleeting in nature. Frequent changes in a company’s customer base is a sign that the business might not yet have found its niche, and could indicate that too much money, resources and time are being fed into the search for the right owner instead.
Another aspect to look for in a potential acquisition is a slow pattern of growth. This might seem counter-intuitive, but once you take over, you don’t want to be dealing with the challenges that too-rapid growth brings. They include customer service issues, shipping, warehousing and training problems, inventory obstacles and hiring pressures.
Experts note that you should look for a business that has shown a slow but steady pattern of growth, as well as one that’s producing a service or product that is in demand and has longevity.
Potential Challenges of Buying Businesses
Valuation issues. Each good decision you make for a startup business creates added value. However, when you’re operating an existing business, you’ll be paying for value that has already been created. How much you should pay depends on your evaluation of the business’s potential and its past performance.
Concealed problems. Some market realities might not be evident when starting a new business. Likewise, due diligence may also fail to highlight challenges that an existing business will face. This can be circumnavigated by involving skilled professionals in the purchase process to detect any future issues.
Management challenges. When you purchase a business, you’ll inherit the staff members employed at the time of sale. It will be up to you to let go of poor performers and hire more adept staff members if necessary. And you may not always get along with existing employees. You might also encounter resistance to change, considering that there’s already an established corporate culture.
Creating a Company from Scratch
Under the right circumstances, building your own company from the ground up can be an incredibly fulfilling and profitable experience. However, it’s also a big risk, and will require long hours and plenty of stressful, hard work to achieve.
You won’t likely be starting out with money; you’ll need to go out and earn it. You won’t start with an established customer base either, so you’ll need to build it up from the bottom. There won’t be any experienced or skilled staff to show you how to get things done while you settle in. You’ll be completely responsible for the operations and the fate of your business.
Here’s another hard fact to face: 90% of start-ups fail at some point or another. You’ll need a revolutionary idea or concept to compete in your industry. If it’s particularly competitive, it may take you years to get your pursuit off the ground.
Important Start-Up Considerations
Another factor to bear in mind is that a successful business requires so much more than just a bright idea and solid implementation to work. You’ll need to extensively research your idea for viability, profitability, and other factors before you put your money into it.
Many business ideas that seem to make sense initially fall apart under closer scrutiny, especially considering fierce competition and ever-changing demand.
On the other hand, one of the advantages of this option is that you can start as small as you like, shelling out minimal capital upfront. You can then expand operations on your own terms whenever you’re able. You’ll also be able to test your business idea from home or a small office before going commercial.
If you’ve completed plenty of market research, have a unique idea, and a solid business plan template to match, starting your own company can be more than viable.
Conversely, buying an established company will mean that you only need to make small and gradual changes to get it running the way you prefer. Your bankers will also appreciate your investment in a
safe source of income and are more likely to back your acquisition as opposed to a foundational business with middling chances of success.
Which is the Best Option?
At the end of the day, there’s no right or wrong option. Both buying an existing business and starting your own, both have advantages and risks. It’s up to you to assess them and decide which risks you are willing to take in your pursuit of commercial success.
However, when in doubt or lacking in an airtight idea for a new venture, err on the side of caution and opt for an existing business instead.
