Advantages and Disadvantages of Buying a Small Business
Pros and Cons of Buying a Small Business
Starting a small business can be an exciting time with the potential for great success. However, starting from the ground up is not your only option; you can also purchase an existing and established small business. This may seem like the more attractive option for some, but it is important to consider all of the Pros and Cons of Buying a Small Business and a few of them are discussed below.
Advantages
1. Everything is already set up
A lot goes into starting up a business, but most of the start up work has already been done when you are purchasing an existing business. You will be acquiring a business where there are suppliers in place, staff is trained, and procedures and protocols already exist. This can make the transition much smoother while you adjust to the new business. This seems much more attractive when compared to starting up your own business because you will have to invest a lot of time and money in order to get to this point.
2. Immediate cash flow
Purchasing a healthy established business will allow you to bring in sales from day one versus it taking many years to turn a profit if you were to start your own business. This cash flow will allow you to focus on making improvements and upgrades. Whereas, if you started your own business, your focus would be on finding financing.
3. Easier to secure financing
In relation to cash flow, it also becomes easier to secure financing once you have purchased an existing business. There is a lower risk for lenders because an existing business often has a steady cash flow and established reputation, and this may result in more favorable terms for you as a business owner.
4. Established brand and customer base
Growing and establishing your brand during the start up phase of your new business is not easy. It takes a lot of money and time to break into the marketplace. However, if you purchase an existing business, the brand is already established, and this reduces the investment you will have to make.
An established brand goes hand-in-hand with an established customer base. One of the most difficult things to do is build an initial customer base. An existing business will already have done this, and you will inherit it. Your focus can then turn to continued customer acquisition. It is also much easier to make adjustments to your brand if you can rely on an established customer base.
Disadvantages
1. Greater initial investment
A healthy established business is not going to sell for cheap. So, it is very likely that you will have to pay a greater amount to purchase an existing business compared to starting up your own. This initial investment may also increase if the existing technology is outdated and requires upgrading.
2. Everything is already in place
This was listed as an advantage, but it can also be a disadvantage. There is the potential for outdated operating systems and technology which will need replacement. Having trained staff in place is great unless they do not exhibit professional practices and their work is not up to company standards. It is a good idea to ask the current owners to allow you to inspect every aspect of the business from the inside before you decide to purchase.
3. Integration
Purchasing an established business and trying to impose your vision may be challenging, considering it already has its own culture. This can result in pushback from employees and customers, especially if changes are made to staff and/or business practices. It may just be the case that this business was not a good fit with your goals and as such, it can turn into a black hole for your time and money.
These represent some of the advantages and disadvantages of purchasing an existing business. However, the decision to purchase or not will depend entirely on your current situation with regards to your finances and goals. It is a good idea to consult a small business lawyer who can help compare the costs of purchasing an existing business versus starting your own.
