A Case Study: Buy A Business Vs. Start A Business

Should I buy a business or start a business from scratch? This is one of the common questions many entrepreneurs may ponder when they think of doing business. Most entrepreneurs have a hard time choosing between starting a business and buying one for a lot of reasons.

So, how do you tell whether to start a business or buy a business? Which option is best?

To make this Case Study fair enough, I will be looking at both sides of the coin so we decide together.

Buying A Business

An entrepreneur may decide to buy an already existing business with the aim of turning it around or capitalising on the revenue.

Pros:

* Saves time: It is no brainer that it takes a lot of time (usually in months and years) to turn an idea into an established business. Lucky enough, all the stressful and somewhat “boring” early stages of a business are taken care of already. That is really invaluable.

* Saves money: Yes, it will take money to buy the business. However, buying an established business saves you from a lot of the money “wasting” done in startups to prove a business model.

* Proven business: It is said that up to 9 out of every 10 businesses started end up failing withing the first three years. Buying a business that is already making money is a prove that the business has a proven business model and is already up and running.

* Makes you money faster: The goal of every profit-making business is to make money. By buying an existing business that is already making money, you have the opportunity of making money almost right after buying the business.

* Access to valuable assets: Existing paying customers, licenses, patents, business registration documents, trademarks, and employees are valuable assets that are very difficult to come by. All these (and sometimes even more) are automatically acquired as part of acquiring an already established business.

Cons:

* Industry skills and experience may be necessary for success: In some cases, just buying a business because you can afford or because it is on sale may not be enough. The new owner may require some level of industry expertise to grow the business. You definitely don’t have to be an ex-footballer to own or run a football team. But, basic understanding of how football teams operate is very essential.

* Less emotional connection with business and its history: Building a business from scratch makes the founder emotionally “attached” or invested in the business and its history, just like raising a child does. That is likely something you will miss when you buy an established business.

* Needs a “big” initial capital: An established business may require some lump sum payment upfront. This makes buying a business “expensive” up front than starting from scratch with just little capital.

* You may incur some hidden liabilities: Just as inheriting valuable assets, you could also inherit some liabilities if enough due diligence is not done. Previous owners seeing some “loophole” ahead may decide to sell their business which looks perfect on the outside if enough checks are not made before buying.

* Can do just little in terms of changes to business model: The business was doing great without your presence. This means it can still do great without you (the new owner) doing much. This, likewise, makes it hard for the new owner to make quite a lot of changes if the need be because that may likely result in changes to business model and/or loss of a valuable asset like customers.

Ideal Situation:

* If the exact business you want to start has already being started, doing well, and is on sale;
* If time is not on your side to start and grow yet another business;
* If you have enough capital to buy;
* If you care less about the rudimentary hustle” of starting a business and more about running a business as CEO;

Then you want to consider buying a business.

 

Starting A Business

An entrepreneur may decide to start his own business with the aim of turning it into a huge business in future to pay him multiple times what he has put into it thus far.

Pros:

* Sense of pride: there is this sense of joy and satisfaction that comes with being a founder irrespective of the size of your business. The fact that you started something that is growing makes you feel proud of yourself.

* Opportunity to learn a lot of skills: In the early stages of the business, you are likely not rich enough to hire a whole team. So, you get to do a lot of things on your own – from sales to customer service. You may not be the best in all fields, but the opportunity to know another skill is amazing.

* Control: Starting a business from scratch means you call most or all of the shots. You have an absolute control over the business as a founder in the beginning and turn the venture into any path you want. You also enjoy the privilege of being in charge of most of the day-to-day activities of the business.

* High returns in stakes: You are likely going to earn multiple times how much you put into the business over some in the future when the business becomes successful. Sometimes, up to 1000 times or more. This is because you “starved” yourself in the beginning to build your business.

* Freedom: Freedom here does not mean you work less, unless you have a big business that doesn’t need your presence. However, the freedom to be “agile” in your strategy is very invaluable. If something doesn’t work, you can easily adjust. After all, you are not fully established or have less to lose than a corporation. You have the freedom to try and test a lot of strategies, products, services and ideas faster and cheaper than an established corporation.

Cons:

* Stressful: It is said that, “the closest a man can be to child-bearing is for him to start a business”. It is 100% stressful. You will be wearing a lot of hats and be doing a lot of things at a time. If you started the business to “be your own boss”, you will be disappointed as everyone else is actually your boss – from the investor to the customer. You may do “overtime” without any bonuses for a long while and have some sleepless nights once in a while.

* Less resources to blow up: If you changed from being an employee to being an entrepreneur, you will observe that most of the resources – employees, cash, customers, etc – at your former job are missing. Yet, you may be competing with “giants” who have it all. Your lack of ready capital, team, locations, etc. will keep coming up whenever you want to become big as a business.

* Probability of failing: It is said that, “9 out of every 10 businesses (90%) fail within the first 3 years of existence”. With such a high failure rate, you can imagine how close your new business is to failing than succeeding if things don’t work out well. Besides, the fact that you have the best or revolutionary idea does not mean you will have the best business. Your work in the early stages is to prove your business model and hopefully get your business to thrive.

* Takes too much time: Building a business takes time. In fact, a lot of time. This may not be much of a problem if you are still a teenager. However, if time is a big deal for you, you will likely use (or waste) even more of it in building your business.

* Costs more (money) in the long run: Obviously, buying a business with a proven business model will cost you some money upfront. But, have you thought of how much it costs to “test” an idea over a 3 year period? Some new businesses could even require millions of dollars to just start, without the assurance of that business surviving in the long while.

Ideal Situation:

* If the business you want to start is so new or unique and not done before;
* If time is on your side or not a big deal;
* If you don’t have enough capital at the early stages to buy a business;
* If the rudimentary “hustle” and unpredictable nature of starting a business excites you more than running an established business as CEO;

Then you want to consider starting your business from scratch.

As I end, there is clearly no “good” or “bad” option. However, to start or buy a business largely depends on the entrepreneur, her available resources, and nature of business. Either way, one could still achieve their dream of owning business or leading a team.

 

Leave a Comment

Your email address will not be published. Required fields are marked *