Buying a business is kind of like being in the market for a home. Just as some people appreciate the history and character that come with an older home, others prefer something more turnkey, without the baggage that can saddle an older property. Similarly, when it comes to buying a business, there are plenty of advantages and drawbacks to consider.
Pros of Buying a Business
1. Proven Business Concept
When you launch a brand-new business, a significant portion of your time is devoted to the planning phase. You must meticulously craft a business plan and strategize on how to turn that plan into a thriving reality.
However, when you opt to buy a business that’s already up and running, you typically inherit a well-established framework:
- A physical location or office space.
- Inventory and essential equipment.
- An established brand and business identity that people recognize.
- An existing customer base.
- A network of trusted vendors, suppliers, and manufacturing resources.
- A team of dedicated employees willing to share their knowledge.
- Established management processes and policies.
- Insight into the competitive landscape and your target market.
While these elements may not be in pristine condition, acquiring an existing business means that much of the groundwork is already laid out. This can save you substantial time at the outset, allowing you to focus on fine-tuning and growth. Especially if you’re venturing into a new market or industry, skipping the challenging startup phase can be a significant advantage.
2. Lower Operating Costs
One of the major perks of buying an existing business is the reduced operating costs. Consider this: launching a brand-new restaurant can cost over $450,000 for initial supplies, food and beverage inventory, signage, and custom kitchen design. When you take over an existing business, your initial operating costs are significantly lower because many key elements are already in place and ready to roll under your leadership.
You won’t need to allocate a substantial portion of your budget to hire employees, devise complex marketing strategies, or build a customer base from scratch. These aspects come as part of the package. Instead, you can invest your capital in expanding and moulding the business to align with your vision.
3. Easier Financing
While buying a business is not without risk, lenders and investors often perceive it as a lower-risk endeavour compared to launching a new company. This perception arises from the business’s existing financial history, which allows lenders and investors to assess past performance and predict future success. Moreover, there’s an abundance of data about the company’s market position, competitors, brand recognition, and customer base.
These factors make investors more inclined to invest in the business, and lenders more comfortable extending a business acquisition loan. In some cases, the current owners may even participate in financing the transfer of ownership by providing a loan.
4. Intellectual Property Opportunities
When you acquire a business, you sometimes gain more than what meets the eye. If the business-to-be purchased patented products, boasts a copyrighted slogan, or features a trademarked logo that resonates with customers, you inherit this intellectual property. This means that, along with the tangible assets, you might acquire intangible assets with considerable value.
This aspect is especially important if you believe the business has the potential for further expansion. Imagine transforming a small business into a national franchise – suddenly, those patents, copyrights, and trademarks become invaluable. Intellectual property is often included in sales of software companies, tech businesses, and creative ventures like music, design, and art.
Cons of Buying a Business
1. Higher Upfront Purchasing Costs
While buying an existing business can save you money on operating costs, it often entails substantial upfront expenses. In fact, these purchasing costs can sometimes surpass what it would cost to start a new business from scratch.
In addition to the tangible assets, you’re also acquiring ownership of intangible assets, including the:
- Existing customer base.
- Established brand identity.
- Design work, from logos to store interiors.
- Business concept and plan.
- Time, effort, and money invested in product testing.
- Refined processes, procedures, and policies.
- Existing income stream (if the business is already profitable).
- Assets and equipment.
- Intellectual property, such as copyrights, patents, and trademarks.
All these items become part of the negotiation process between the buyer and seller and play a crucial role in determining the final purchase price when buying an existing business.
2. Unfamiliarity with the Details
If you’re purchasing a business you didn’t start yourself, you might find yourself less familiar with its inner workings, including the finer details of its products, processes, employees, and financials. This lack of familiarity can pose a challenge, especially when you’re just getting started. It becomes even more pronounced if you’re entering an industry where you have limited experience. Be prepared for a steep learning curve as you become acquainted with the intricacies of the business.
3. Risk of Hidden Problems
As a prospective business buyer, you’ll undergo a thorough due diligence process, gathering information about the business and its current owner. However, no matter how diligent your efforts are, there’s always a risk of encountering hidden issues or problems that are worse than they initially appeared. For example, equipment might be damaged, or the business’s brand could have a tarnished reputation. When you buy a business, you inherit these issues, whether you’re prepared for them or not.
Before making the final decision, it’s highly advisable to conduct an independent business valuation. This not only helps uncover hidden problems but also exposes potential risks and provides you with a realistic market price for the business. By assessing the business’s actual worth, you gain a clearer understanding of its value in relation to your investment.
In conclusion, buying a business is a significant decision with its set of pros and cons. While it offers numerous advantages, such as a proven concept and lower operating costs, it also involves challenges, like higher upfront purchasing costs and the need to familiarize yourself with unfamiliar details. To make an informed decision, consider conducting an independent business valuation and seek expert advice to guide you through the process. Remember, every business acquisition is unique, so thorough research and careful consideration are essential to ensure a successful venture.