Buying an Existing Business Versus Starting a Business

The decision whether to buy an existing business or start a new one hinges on both personal and financial issues. Start-ups almost always encounter stumbling blocks that slow down the company’s progress and even put its future in jeopardy, creating a great deal of stress for the management team. But starting a company and seeing it grow can be incredibly exciting. Obtaining financing to purchase an existing business that has assets and cash flow is often easier than securing capital for a start-up venture.

Risk Factors

Starting a business is inherently risky, and many start-up companies fail. Venture capital firms, highly skilled in selecting investments and building companies, expect that out of ten companies in which they invest, at least two will fail and several others will have mediocre financial results. A start-up entrepreneur deals with many unknowns, such as whether customers will be motivated to buy the company’s products and services, and whether the company can operate efficiently enough to generate a profit. An existing business already has customers and a reputation in the marketplace; the challenge is in building upon what already has been accomplished.

Valuation Issues

With a start-up, you create value in the business with every good decision you make. When you purchase a business, you are paying for value that has already been created. How much you are willing to pay depends on your evaluation of the company’s potential for the future, as well as what it has earned in the past. It is common for the buyer to pay the seller over a period of time; if you significantly overpay for the business, it can mean you will not have the cash available to make the investments you have planned for building and improving the company--or even be able to afford to pay yourself the compensation you'd envisioned.

Concealed Problems

When purchasing a business, during the due diligence phase the buyer and his legal representative review the financial statements of the business and attempt to establish a value for the company. Financial statements do not tell the whole story. The company may show significant receivables on the balance sheet, but the question is whether these can actually be collected and turned into cash. Difficulties may lurk on the horizon that have not yet shown up in the financial statements, such as new competitors on the verge of entering the market.

Management Challenges

When you start a company, you assemble the management team, selecting the best people you can find--and those who can work well with you and as a team. When you buy a business, you inherit the people already in place. It takes time to weed out the poor performers; a long-time employee may resent the new owner because he thought he would be given the chance to be CEO someday. In an existing company, policies, procedures and a corporate culture are already in place. The new owner may encounter resistance to change.

Rewards

When you buy a business, the financial rewards begin right after the transaction closes because the company is already generating cash flow and hopefully is profitable. Start-up companies usually go through a painful period where they lose money. The entrepreneur must be patient and not expect financial success too soon. The satisfaction that comes from starting a company and making a success of it is enormous; you realize you have created something--on your own and against significant odds.

Link to original article: https://smallbusiness.chron.com/buying-existing-business-versus-starting-business-2477.html