You have two options when you go into business. You can start a new business from scratch or purchase an existing business. Buying a business might seem like a good option because you skip the painful start-up period. However, this approach has disadvantages that it would be wise to consider. Here are the pros and cons of buying an existing business compared to setting up a new enterprise.

Advantages of Buying an Existing Business

Physical Assets

When you buy an existing company, you acquire the business’s physical assets. Depending on the business and sale agreement, those assets might include business premises, inventory, machinery and equipment.

No Start-Up Period

An established business will already have gone through the start-up period. The groundwork will have been done, the company will be trading, and operational processes will be in place. Consequently, you will not have to set up all the rudimentary foundations of a new business. In theory, you can hit the ground running with an existing business.

Proven Product or Service

If the business is trading, you know you have a saleable product or service. The product has been tested on the market and has been well-received. A proven track record of sales removes some of the risks associated with starting a new business.

Existing Customer Base

Naturally, if you have a product that sells, you also have a customer base, which can be extremely valuable. If you have repeat sales or recurring income, you have a ready-made income stream on which you can build. You also have a captive audience to whom you can sell new products or services.

Established Brand

Developing a recognizable brand for a start-up can be a slow process. However, an established business will already have a degree of brand awareness. You may, in time, wish to rebrand the company. Nevertheless, in the meantime, you have a brand that you can work with as you come to grips with and develop the business you have acquired.

Access to Finance

An existing business will have a credit history and, hopefully, a good credit score. Your due diligence before the purchase will have highlighted any issues in this respect. Assuming that the credit history of the business is good, it will be easier to obtain loans for the existing company than it would be for a start-up.

Existing Employees

You will also inherit an existing workforce when you purchase a business. You will gain contacts like suppliers, freelancers, and professional service providers. These resources may not be what you would have selected yourself. However, existing employees and other resources will be familiar with the business, which reduces the need for training. Some team members may also have built good relationships with customers and contacts, which will help with continuity in the short term.

Disadvantages of Buying an Existing Business

The above are the main benefits of buying an existing business. Here are the potential pitfalls of purchasing an established company.

High Initial Cost

The price you pay for a profitable business will be way higher than the cost of starting a new company. The current owners will require all or most of the purchase price immediately. Consequently, the financial risk is more significant. You must have sufficient funds to buy a flourishing business.

Inherited Problems

Due diligence is essential when buying a business. However, there is a limit to how much detail you can get into, and some things may be overlooked. You could, for example, inherit unfavorable long-term contracts with vendors. There may be off-balance sheet liabilities that did not come to light in your initial investigation of the company. There might be disgruntled customers, or the brand might have developed a bad reputation.

Significant Changes May be Required

What looks good on paper is not always good in practice. Once you get your feet in the door, you might find that significant operational changes are required to make the business function efficiently. The assets you acquired, for example, might be close to the end of their useful life. You may have inherited a disgruntled, uncommitted workforce. IT (information technology) infrastructure and software may be woefully outdated.

Additional Funding May Become Necessary

The money you pay the seller of a business is a sunk cost that does nothing for the company. The business may also require further investment to get it to where you want it to be. You may even find that additional working capital is necessary to keep the operation viable.

It Takes Time to Make a Business Your Own

When you set up a new business, you can have everything the way you like it from day one. When you buy a new business, you are stepping into someone else shoes. It will take time to gain complete control over how the company is run. Every operation and process can’t be changed overnight. Employees may be resistant to changes made by a new owner. Rebranding takes time and costs money. Consequently, it may be some time before the business operates the way you want.

Conclusion

As you can see, the decision to start a brand-new business or buy an existing one is not clear-cut. It is advisable to consider the pros and cons of both options before proceeding. You must conduct extensive research into any business you are considering purchasing.