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Starting a New Venture vs Buying an Existing Business
Many people find the notion of owning a small business intoxicatingly exciting. The idea of starting something new, creating a product or service, establishing a brand and reaping the success, all have a potent appeal, but are rarely grounded in the true reality. That reality of dealing with business plans, financiers and investors, legal issues, locations, employment, and other associated aspects of a start-up can pay a hefty toll on one’s motivation when you start to consider all that risk!
For those with a more conservative approach to risk, and are able to recognise a more pragmatic approach to success, buying an existing business is often a safer and more straight forward alternative.
Advantages of buying a business
The main reasons for buying an existing business are the enormously reduced start-up costs of time, money, and energy. Cash flow is usually immediate due to existing stock or inventory and an established customer base. Having immediate cash flow and a previous track record will also make the business far more appealing to financiers and investors. An existing business will usually have established systems and a relatively stable work force. As a new owner, you can focus on learning the details of the business and its operations so you can begin developing a strategy for future growth.
The biggest resistance to purchasing an existing business is usually the initial purchasing cost. With the business concept, brand, business systems, supply chain, customer base, proven cash flow and other fundamental work already done, it’s no surprise that the financial costs of acquiring an existing business are often greater than starting one from nothing. However, consider how much risk you’ve just removed from the business equation; and don’t forget that 2 out of three start ups fail in the first year! Does the impact of that price premium suddenly start to melt away?
There are several advantages to buying an existing business that are worth highlighting.
Established customer base
Acquiring customers for any business is an expensive process. Retaining them is a lot easier and lot less costly. An existing business usually has a loyal group of customers and that has real cash value to a new owner. A business’s customers are often one of its most valuable assets! Imagine how much it would cost in time and money to build a customer base for a new business. It takes time to establish trust and loyalty with customers. Is it any wonder why businesses run loyalty programmes?
With an existing customer base, a new business owner has an established platform for launching new products or services, especially if these compliment or are consistent with the existing offerings.
As businesses take greater advantage of online communication mediums, social networking is becoming a critical component to business success. Existing businesses already have a database of customer contacts that can be accessed for e-mail marketing, social networking and other promotional communications.
A Proven business Model
Buying an existing business can eliminate much of the trial and error that happens in a typical start up. You’ll make your share of mistakes with any business, but the learning curve will be much shorter and the consequences will be much less severe when you buy an existing business.
An existing company will usually have a settled labour force. Employment Agreements and working conditions will have been established and there will usually be very little need for change. In the current economy, many employees will want to stay with the business to ensure their personal security and that will make your life a lot easier.
A profitable small business needs dozens of components that have to fit together properly in order to achieve growth and longterm sustainability. When you purchase an existing business, you’ll gain established systems, departments and divisions that have a track record of functionality. If the business you are buying has been around for a while, it’s likely that efficient workflows have already been created and you should expect to see smooth processes and operating procedures.
With an existing business you’ll benefit from the company’s established supplier and vendor networks. These are always subject to change depending on competitive pricing and ongoing efficiencies but there will be minimal need for any initial change if the supply chain is already reliable and cost-efficient. A new business will also be equipped with the resources it needs in the form of tested technology infrastructure to do business effectively.
Access to financing
Financing is a major challenge for any small business, but this obstacle is much easier to navigate when you buy an existing business. Financiers are far more likely to lend for the purchase of an existing business than they are for a start up venture. Financiers also need to minimise their risk, and there’s a lot less risk lending to a business with existing cash flow and a proven track record. This reduces the lenders risk to their ability to access the business skills of the new owner.
There are several reasons why buying a business makes it easier to secure acquisition finance. Lenders finance business purchases based on the assumption that the business will earn enough revenues to keep up with principal and interest payments. Established businesses have existing cash flow and are more appealing to lenders.
Lenders will always require a business plan to understand the business’s potential. Financial estimates in a start up business plan are based on assumptions and projections and increase the lenders risk. What financiers are more impressed by is actual financial history. Buying a business means that you will be able to produce solid financial data and trend information to support your business plan and future viability of the enterprise.
An existing business usually has some form of assets and financiers love assets. Assets provide security that lenders can leverage their capital against to further reduce their risk. This also has an advantage for you as the borrower because it reduces your need to provide external security like your home.
Lenders also feel a lot more confident with a proven business model, particularly when the company has proven its ability to create a profit.
Buying an Existing Brand
Brand recognition is an important factor in business success and with so many brands competing for the public’s attention, it can be difficult to imprint a new brand on the buying public’s psyche.
When you buy a business you’re buying an existing brand. Although companies with highly recognizable brands usually come at a premium, it’s possible to buy a company that has started the branding process and is well on its way to widespread visibility. It makes sense to buy a business to get an established brand.
If an established brand is regarded as an industry leader, its current owner is probably well aware of its brand value. But that’s not the case with most companies that are listed on the business-for-sale market. Brands have intangible value that is often overlooked by sellers. As a buyer, you can translate a company’s hidden brand value into profits after the sale.
Good businesses understand the value of a good brand and will fiercely protect it. Consider the competition between Coke and Pepsi, Microsoft and Apple. Some brands are so powerful that they are imitated - like England wearing a black jersey (as if it will help?!). Established brands have fought hard to claim their market position and engage in fierce battles to promote their brand. An existing business will often have elbowed their way up in the competitive brand arena.
When you buy an established brand, you’re buying more than just a name and a logo. Brand acquisitions almost always come with other brand assets including websites, marketing concepts, images, jingles and customer loyalty.
A business with an existing brand is worth more than one that is struggling to achieve recognition with consumers. Buying a business with an existing brand frees you up to concentrate on other parts of your new business. If you continue to grow the brand during the time you own the business, the brand will have increased value and greater saleability when you come to sell the business.
Is buying a business the Same as buying a job?
In the current economy with the difficult job market, many professionals and entrepreneurial business leaders are electing to buy a business rather than seek traditional employment. The idea of buying a business has a lot of benefits, not the least of which is the potential to provide the owner with a steady source of income. If the business is already established and profitable, new owners can be reasonably assured that they will be compensated for their efforts.
The biggest advantage of buying a business is that it gives you the ability to exit today’s highly competitive job market. A business provides a great outlet for your professional skills, the ability to be in charge of your destiny, the opportunity to grow an asset, and the ability to continue to enjoy a secure income relative to the scale of the business. You get to determine what you’re actually worth, and you can also adjust your income to suit your tax planning strategy.
Small businesses can also provide non-salary income for their owners. Owners can take dividends from the company as a way of supplementing their income. But even more importantly, the hard work you invest in your business can eventually lead to a much bigger payday when it’s time to sell the company.
Article written by Dave Morgan - General Manager LINK Wellington