Before you decide whether buying a business is the right path for you, take some time to learn about the pros and cons of this option. There are benefits and opportunities for gain. However, there are also risks, potential pitfalls, and investments you'll need to make to succeed.
Let's dive into the pros and cons of buying a business.
Tell me about the advantages of buying a business.
Buying an established business can be a smart move for many people, especially those who are willing to put in the due diligence that's needed to find and assess opportunities. Businesses that are established, profitable, and have a steady stream of customers can offer lots of advantages. These might include:
An established structure.
Good pre-owned businesses have a recognizable brand, a proven business concept, an established customer base, a dependable base of vendors and suppliers, trained employees, a complete set of procedures and processes, and a deep understanding of their competitive positioning.
Startup business owners can spend a hefty amount of time and resources developing these parts of a business. As a business buyer, you can acquire most or all of them in a single transaction.
Faster ramp up.
When you buy a business, you might invest time into simplifying processes, eliminating costs, or gaining access to new markets. Still, you’ll likely avoid the lengthy ramp-up time many startup owners need to find suppliers, build an inventory, and reach their target customer base.
Clarity of costs.
When buying an established business, you’ll be able to examine the company’s financials before agreeing to take control of it. You’ll learn how profitable, indebted, or costly it is to run because you can examine years’ worth of records in advance of the sale.
Startup business owners don’t have this advantage. They may be able to make projections, but they can wildly underestimate the capital they need to help their business thrive.
The ability to bypass initial-phase costs.
Between establishing a site, developing a web presence, purchasing supplies and equipment, and getting the word out about a business, startup owners often spend a significant amount of money in their first year of operations.
As a business buyer, you could bypass many of those costs. This is especially when the business you choose is well-established, running smoothly, and well-known in its market.
More options for financing in buying vs. starting a business.
Lenders are more willing to provide financing for businesses with proven performance, verifiable cash flows, and demonstrable profitability than they are to startup ventures.
As you read through these points, you can see many advantages of buying an established business over starting one. Of course, business ownership in any context can be rewarding. In this role, you can set your own hours and metrics of performance. You have a say in who you work with and the kind of environment in which you’ll operate. You also become your own manager and can establish policies and practices that make sense to you.
What about the drawbacks of buying a business?
There are lots of advantages, but some parts of buying a business can seem less favorable. Here are a few of the drawbacks:
High upfront costs.
Purchase prices can be significant because they account for more than just the assets and equipment a business holds. As a buyer, you’ll gain rights to the business’s brand, customer base, concept, strategic plans, processes, intellectual property, and capacity for profit.
Because of the value of those elements, many businesses sell for one to four times their cash flows with prices that can range from thousands to millions of dollars.
Here's the good news: You can acquire most of the funds you need for buying an established business through SBA loans, seller financing, or other financing options. But keep in mind that the process to attain funding can be lengthy, and the funding comes at a cost.
Steep learning curve.
By buying an established business, you’ll take ownership of an operation that runs on processes, policies, and practices that will take time to learn. You might find it difficult to get up to speed quickly and gain the knowledge you need to guide the business effectively in the early days of its transition.
There is a workaround that helps lots of new business owners. Many arrange for seller support after the purchase of their business, either by hiring them as a consultant or employing them for a short period of time. You might also be able to retain some managers or employees who can help the business endure through the transition.
Potential for unforeseen problems.
Before buying an established business, you’ll take part in a rigorous due diligence process that should help you spot the business’s problem areas and risks. However, there is a possibility that you’ll uncover other problems once you take ownership, and those problems could be costly to solve or quite difficult to navigate.
Those problems may include:
How should I proceed?
After reviewing the pros and cons of buying an established business, you’ll need to decide if the advantages of business acquisition are worth the potential risks.
Keep in mind that there are steps you can take to lessen the risks:
- Hire a team of qualified professionals to guide you through the process (which should include an accountant and an attorney).
- Learn how to conduct the due diligence you need to gain confidence in a business’s viability.
- Access a roadmap that’ll help you understand the requirements of acquisition and what you can do to maximize your odds of success.
Buying a business
Interested in a step-by-step guide that will help you through the process of buying a business? Log into your owner’s portal to get started.