The Advantages and Disadvantages of Buying a Business as Opposed to Starting One from Scratch

The Advantages and Disadvantages of Buying a Business as Opposed to Starting One from Scratch

If you are considering owning a business have you thought about buying a business as opposed to starting one from scratch? If you have the money or can borrow from family or a bank this may not be a bad idea. There are several advantages of buying an existing business.

First and foremost the business is established and has a proven track record. The most bothersome aspect to starting a business from scratch is that there’s no telling how that business will be received from the public. When you buy an existing business the proof is already there for you to see. If the owner has kept good financial records you can see income and tax returns for as long as the business has had its doors opened. Not only are the financial records invaluable but you can actually see the operation live and in progress before deciding to purchase.

Granted when it comes to a restaurant or a physical store of some kind this evaluation can be easy but what if you are buying Joe’s Plumbing or Charlie’s Contracting? If you’re buying a business that was or may be successful because of who the person was and most of their business was coming from friends and family connections than is there a possibility you could lose the majority of the income when you take over and Joe retires? This is something that would need to be taken into account prior to purchasing. Make sure that if you are considering a business like this that there are some guarantees that current contracts are in place that notify and prevent current customers from walking out when the new owner walks in. I don’t think this would be important if you were taking over a retail outlet of some kind but if you are buying a business where a small handful are responsible for the income of the business than it would be wise to take proper precautions that those clients will remain once it has been taken over. After all the sale of that business is most likely valuated in regards to its annual income and if you lose that income than you are paying for something that won’t be there when you take it over.

A perfect example of this is when I owned my logistics company. I had no contracts with my clients but I had contract rates. So long as they chose me week after week than I was paid a certain amount we had decided upon. My relationship with my contractors was extremely personal. If I had decided to sell my company to another they were at the mercy of whether or not my clients decided to keep them. They would have to prove themselves week after week like I had to. It was an issue that did not raise the value of my company. Looking back on it I may have been smarter to draw up yearly or semi-annual contracts to lock that business down.

Another major advantage to taking over an existing company is that there’s less to set up. If you are buying a retail outlet for instance the store is set up already and you will get the list of distributors. The prices are set on the products so you don’t have to figure out what to charge customers.. The design of the store is in place and all the employees are hired. It is more or less turn-key. What more could you ask for? As soon as it’s bought you can get right down to introducing yourself to customers and building rapport with them and the community.

So buying a business is definitely a positive way to go but it would be essential to do homework on any sales claims. Be sure to ask for tax records because you will usually find any discrepancies on the income and costs of doing business. It would be a good idea to understand and know why that person is selling the business. If the owner claims it to be a hit than why are they selling it? Good common sense would come in handy here. I can’t imagine too many people would sell something that is making tons of bucks unless there are extenuating circumstances such as retirement or what not.

I imaging the biggest hang up for those wishing to buy an existing business is that you need lots of cash or credit to do so. It often isn’t cheap and that in itself knocks off the majority of interested parties. Buying a business could cost anywhere from tens of thousands to millions of dollars depending on business potential and what all is included in the purchase.

In answering the two ways in which someone could buy a business the answer is that you can buy stock in a company or you can buy the company. I don’t know if any one way is preferable over the other but typically if you are buying stock in a company you would be looking at spending millions, maybe even billions to buy 51% ownership. Buying stock alone conveys an amount of ownership determined by the amount of shares divided by the total shares. Approaching ownership in this fashion carries less control and less headaches too. By buying stock in a company you don’t have to worry about having to dedicate your life to making the business run. There would already be a group of people running the company. Although because you do own the company it would be in your best interest to vote on the major issues up for debate as you do have a say.

So in summary the options you have for buying an existing business or buying into a company depends on the assets you have available to you as well as the level of participation you want to put in. If you’re looking to start a business and have the cash or credit necessary to buy an existing one it wouldn’t be a bad idea to take a look at some existing businesses for sale as opposed to starting one from scratch. However if you have a great or novel idea starting a business from scratch might be the best or only option. Either way you will have to figure it out based on your specific situation. If you don’t have the start-up capital or the credit but are interested in being a business owner you can always start small and invest in companies through stock offerings. This might in the end be the only choice you have to start.

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