If you’re an aspiring entrepreneur, you may be debating whether to start a business from scratch or buy an existing one. Buying an established business can seem tempting—you skip past the risky startup phase and potentially gain an instant customer base and revenue stream. However, acquiring a business also comes with challenges and risks to consider. This guide examines the pros and cons of buying an existing business to help you decide if it’s the right path for you. Ultimately, it would also depend on your business plan to make everything work out..
How Buying a Business Works
Before weighing the potential upsides and downsides, it helps to understand the process of buying an existing business. There are several steps typically involved:
- Search for businesses for sale. You can browse business for sale listings on sites like BizBuySell and BusinessBroker. Brokers and business advisors can also help connect you with sellers. Focus your search based on type of business, size, location, cash flow, and other factors important to you.
- Assess and value the business. This is an essential step, so you don’t overpay. Examine financial records, tax returns, operations, the customer base, assets/property, and liabilities. Consider hiring a professional valuation firm or advisor to help determine a fair price.
- Make an offer and negotiate terms. Once you’ve settled on a business to purchase, you’ll make an offer and negotiate the price and terms with the seller. Use the valuation as a guide.
- Secure financing. Most buyers need a business acquisition loan or other financing to fund the purchase. Shop around with banks and online lenders to find the best rates and terms.
- Conduct due diligence. Dig deeper through the due diligence phase to verify all information about the business. This includes inspecting operations, facilities, financials, legal contracts, intellectual property, etc.
- Close the deal. Finally, you’ll sign the purchase agreement and handle the legal transfer of the business assets and ownership.
Pros of Buying an Existing Business
What are the potential advantages of buying a business rather than starting one from the ground up? Here are some of the top pros to consider:
Established Brand and Customer Base
When you buy a business, you typically acquire any brand recognition, customer base, clientele, patients or other following that it has built. This gives you instant revenue and cash flow, eliminating the need to attract new customers from scratch. The existing relationships can be invaluable.
Start Generating Revenue Immediately
An existing business with stable cash flow allows you to start profiting much more quickly than forming a new business. You avoid losing money in the startup phase as you establish your brand and attract initial customers.
Gain Market Share Faster
Similarly, buying a business with existing market share saves you time gaining a foothold in the industry. You take over its share versus battling competitors as a new startup.
No Teething Stage
When launching a new business, it takes time to work out any kinks and operating procedures. Buying an established business lets you skip past the risky, unstable “teething” stage that new companies go through.
Begin Operating Immediately
With a new business, you must handle a long checklist to get up and running—and delays can slow you down. When you buy a business, often you can take over operations without pause. Vendors, staff, systems and everything is already in place.
Gain Existing Vendors/Suppliers
You typically take over the seller’s vendors, supplier relationships and distribution channels. This established infrastructure can provide an advantage, versus having to build it yourself as a startup.
Gain Experienced Employees
A business you acquire may come with experienced employees who are knowledgeable about operations and industry intricacies. This talent can help the transition and train new employees you bring in.
An existing business likely has an established office, retail shop, manufacturing facility or other commercial location already set up to operate from. Finding and securing real estate can be one of the toughest parts of launching a new business.
Built-In Systems and Processes
With a mature business, you gain existing systems for operations, inventory, production, customer service, CRM, accounting, HR and more. You can avoid the time-consuming process of developing these from the ground up.
One of the best parts of buying a business is the unlimited options and niches available. You can search for businesses in any industry, location, size, price range and profit margin you desire. The ample choices let you be highly selective and find the ideal match.
Pride of Ownership
Finally, buying an existing successful business can provide instant gratification, pride and confidence that starting one from scratch cannot. Taking ownership of a prosperous company with happy employees and customers may be highly rewarding.
Cons of Buying a Business
Despite the many potential upsides, acquiring a business comes with considerable risks and downsides to weigh as well. Some top cons include:
Overpaying is Common
One of the biggest dangers when buying a business is overpaying for it. Sellers naturally want to command the highest price possible, so don’t rely solely on their asking price or stated valuation. Without an independent professional appraisal, you risk making assumptions that lead you to overpay.
When taking over an existing business, there could be lurking problems that don’t come to light until after the purchase. For example, you may inherit equipment in poor shape, underperforming product lines, unhappy employees, pending lawsuits, compliance issues, accounting discrepancies or outdated IT systems that require investment to fix.
Loss of Key Employees or Customers
A business is only as strong as its people and customers. When under new ownership, some employees may leave and loyal customers may explore other options. The disruption can hinder stability and performance.
Drive Away Exisiting Customers with Changes
Making too many changes too fast under new ownership—like cutting popular products/services, raising prices, rebranding—may alienate and drive away existing customers initially attracted to the way the previous owner did business.
Dealing with Seller’s Debts
If the business you acquire has any outstanding debts or liabilities, legally you may have to take responsibility for them. This risk must be assessed thoroughly before any purchase.
Supply Chain Issues
relationships and operations are disrupted or altered under new management. You may initially struggle building rapport and efficiency with existing vendors and suppliers.
Even veteran entrepreneurs face a learning curve taking over an established business, especially in an unfamiliar industry. It takes time learning the ropes, systems, processes and industry intricacies—time that new competitors can exploit.
Integrating New and Old Systems
Blending existing systems and processes with your own preferred methods that you install can present challenges and disrupt operations if not managed carefully.
Unexpected Transition Costs
From professional fees to new equipment to IT integration, transitioning and upgrading a purchased business typically entails unforeseen costs that must be factored in.
Untangling Poor Accounting
If the previous owner left behind disorganized financial records and accounting, it can take weeks or months to untangle the numbers and gain true visibility into revenue and profitability.
Potential to Overpay on Taxes
How assets like equipment and property are structured can impact your tax liability. Without unbiased professional guidance on transfers, you risk overpaying taxes.
Difficulty Obtaining Financing
Banks and lenders are often wary of financing purchases of existing businesses. Unless you have exceptional credit and a solid history, securing financing at favorable rates may be improbable.
Key Due Diligence Factors When Buying a Business
To mitigate the risks of acquiring an existing business, you must conduct thorough due diligence before any purchase. While an advisor can help, you need to be hands-on in assessing key areas like:
Financial Records and Tax Filings
Inspect at least 3 years of financial statements, tax returns, sales figures, profit/loss statements, accounts receivable/payable, debts, projections, and bank statements. Look for red flags like declining revenue or inaccuracies.
Equipment, Facilities, and Assets
Personally examine all physical assets and property. Assess maintenance and repair needs so you know what you are getting and can negotiate accordingly.
Operations and Inventory
Look at inventory systems, supply chain processes, production/service operations, technologies used, and staff capabilities. Problems or inefficiencies in these areas can hinder success after purchase.
Customer Base and Contracts
Talk to key customers and look over current contracts and recurring accounts to assess loyalty, profitability and revenue stream stability. A solid customer pipeline is key.
Management and Employees
Gauge the skills and morale of salaried managers and other employees, especially those in critical roles. Retaining top talent is crucial for a smooth transition.