Buying an existing business advantages and disadvantages
This article is about ‘buying an existing business advantages and disadvantages’. In the article I’ll review what are the advantages of buying a business rather than starting one from scratch?
Do any of these questions apply to you?
- Have you ever considered buying a business?
- Are you in the process of buying a business?
- Are you considering setting up your own business from scratch?
If your answer to any of these questions is yes, then you will probably recognise how difficult and daunting this process might be. This article is therefore directed to help you with that decision process.
So the first question you need to answer is:
Do I set up a new business from scratch or do I buy an existing business?
There are pros and cons for both and you will need to weigh these up when deciding upon which route to embark upon.
If for example, you have invented the next best product, the business startup route would be the way to go. However, where the product doesn’t presently exist on the market then subject to patenting the idea, initial market research is a must. You will need to establish the size and appetite of the market for a newly invented product.
However, if you are not the inventor of the next TV or telephone etc, you need to weigh up whether it will be easier for you to buy a business or start one in a field that you already know. To help you consider the answer to this question it is important to look at the following advantages and disadvantages:
Advantages and disadvantages of buying an existing business:
Advantages of buying a business…
- Some of the groundwork will already have been done in getting the business up and running.
- It might be easier for you to get finance as the business will have a proven track record.
- A market for the product or service will have already been demonstrated.
- There are established customers, a reliable income, a reputation to capitalise and build on, and a useful network of contacts.
- A business plan and marketing method should already be in place.
- Existing employees should have experience you can draw on.
- Many of the problems will have been discovered and solved already.
Disadvantages of buying a business…
- The present owner may have close relationships with the existing customers and therefore when they sell and leave you need to ask the question, will the customers leave as well? This is one of the important question you must ask, when you do your initial checks on a business for sale.
- You often need to invest a large amount up front, and will also have to budget for professional fees for solicitors, surveyors, accountants etc.
- If the business has been neglected you may need to invest quite a bit more on top of the purchase price to give it the best chance of success.
- You will need to honour or renegotiate any outstanding contracts the previous owner leaves in place.
- You also need to consider why the current owner is selling up. Normally if they are selling for genuine retirement reasons or ill health this is okay, but always check the reasons for the sale of their business!
- Think about the feelings of current staff – it’s possible they may not be happy with a new boss, or the business might have been run badly and staff morale may be low.
Having listed a number of advantages and disadvantages attached to buying an existing business, I would you to consider the following further points:
If you buy an existing business you know that a market exists for the product or service that it sells…
You might say that the new business you intend to set up from scratch has an existing market. You know this because there are other companies already selling the product or service. So the decision is buy one that is already operating, or start a new business. Look at the reasons why the owner is selling the business – look at the market trends in the sector you are considering.
That might be true, however, you must recognise that it takes time and money to gain market share and when you start from scratch you are starting from zero. Whereas, if you buy an already established business, you are buying both customers and an income stream so most of the hard work has been done for you. That is not to say however, that the business you are buying is in a shrinking market or in a market that is badly affected by a recession.
So you need to consider the economic cycle you are in when you buy a business, because you might not want to buy a company that sells televisions and other luxuries in the middle of a recession, for example.
When you buy a business most of the hard work has been done for you…
There is no doubt that the hardest part of any business is the early days and getting it set up, getting your first clients and getting your initial cash flow. Setting up from scratch requires you to find premises; employing staff; setting up computer systems; deciding on the marketing; getting to be known in the market place; finding suppliers; getting accounts with suppliers; etc. all of which takes time and can in some cases mean a steep learning curve.
Other areas of setting up a new business that you might require is funding and sorting out banks and finance; accountants and other financial advisers; setting up systems and processes within the business; business insurance; telephone systems; etc. whereas most of these will have already been sorted out by the present owner of the business you are considering to buy (not always correctly mind you!)
When you buy an existing business, most of the hard work has already been done for you and whilst you will probably want to appoint your own accountants and financial advisers, most of the other points will have been addressed by the previous owners. Once you have your feet under the table, as it were, you will very likely want to change the way the business is run, especially on the marketing front, however, it is probably much easier to change an existing set up than to start from scratch, because the existing business will already have clients, but more importantly have cash flow.
This existing client base is something that you can go to work on and to build upon and it is important to recognise the value of a client database. Most businesses forget to market to their existing client base so this will probably be your easiest route to growth, by marketing to the businesses existing clients. It costs much more to gain new customers than to sell to an existing one! Which is point missed by most business owners.
If you are swaying towards buying an existing business then it would be better to look to one where the marketing is being done very well right now. This way you are buying “Potential” in the business and can make “Easy” profits and faster gains, let me explain:
When I mention the word marketing – I mean this in the widest possible sense of the word. So for example, does the business make full use of its existing customer base for other products or services that it sells or could sell? Are the premises of the business presentable and the employees welcoming and well dressed? What forms of advertising is the business using and are these being optimised?
There are many more questions of this type you could ask, which are all linked to the marketing of a business. There are some businesses that trade and survive despite themselves and the way in which they are run. You must have been to buy something from a company in the past and received a shoddy customer service! Did you ask the question; how on earth does this business survive?
The truth is that if this is a business you are considering to buy, they are surviving, they sometimes do and these types of businesses come on the market for sale all of the time. So I commend you to buying this type of business and with a little bit of tweaking here and there you will likely turn a loss or a small profit into a good profit in no time. What’s more you should be able to pick up a company like this for a cheap price because of the low profits and of how it is run. A more profitable business is worth more and will be easier to sell again in the future.
My final consideration in this article is in terms of assets at a discount…
If you were to set up a business from scratch, it is likely that you will need to purchase the assets to run the company, at full retail price! For example, all businesses will have computers, telephone systems, office desks and chairs, together with the specific assets needed to run the type of business you might be looking to set up. However, when you purchase an already existing company you will get the assets thrown in for “FREE” because the business cannot be run without them. Admittedly, some of these assets might need to be replaced, but on the whole they work and will come within the value of the business you are buying.
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Related: Advice for small business startups