However, this entrepreneurial route isn’t for everyone. Rather than starting your own business, you could purchase an existing one instead. Buying an already established business will allow you to avoid the often-painful startup period, while still allowing you to run a business. Still, although there are many benefits to buying an existing business, there are also risks involved. In this blog post, we’ll examine the pros and cons of buying a small business that’s already established so that you can make the right decision.
The Pros of Buying an Existing Business
1. The Product or Service is Already Market TestedWhen you buy an existing business, you’ll already have a good idea of how well the market has reacted to the products or services offered. For example, if you buy an established restaurant that’s already a popular spot, you’ll know that local customers enjoy the food. Due to this, you can be confident that these patrons will continue to visit the establishment. Due to this, it’s important to conduct your due diligence; knowing that the product or service is well-received should play a part in your final decision. Once you find a business for sale that you're interested in, consider whether they already have a successful business plan in place.
2. You’ll Significantly Reduce Startup TimeNot only are the products or services from an existing business already market tested, but you’ll also be in the position to start selling quickly. For example, if you’re starting a retail store from scratch, you’ll need to make the following investments:
- Purchase inventory
- Find suppliers
- Hire employees
- Find a location before you open your doors to customers
- Staff members will already be trained.
- There will be pre-existing relationships with suppliers.
- Protocols and procedures will be set.
- There will be a significant knowledge base to draw upon.
3. The Brand Is EstablishedBrands are vital for establishing and expanding your customer base and market presence. Starting a new brand in a crowded marketplace isn’t an easy task, as existing business owners will already have an advantage over you. Many entrepreneurs struggle to grow their brands and draw attention to their products or services, especially during the startup phase. Still, over time your business’s brand should gain momentum. If you buy an established business, however, you’ll often inherit its brand and market share, which can save you considerable time and money.
4. It’s Easier to Secure Business FinancingIt’s often easier to obtain additional working capital, especially traditional financing, to purchase an existing business. If you need a loan to buy a business, it may be easier than getting approved for a startup business loan amount. In addition, the business acquisition loan application process may not be as strenuous because the lender can review the existing business’s finances. For example, a working capital lender will be able to look at revenues, profits, and other financial statements to determine the viability of your business. This can reduce the lender’s risk, and if the existing business is healthy, it will increase the likelihood that they’ll provide you with a small business loan. In some cases, you may be able to pursue SBA loans for purchasing a business. However, some funding programs may not be used to purchase a business, as they're intended for existing business expenses.
5. Access to the Business’s Customer BaseSince this business has already been up-and-running, there should be an existing customer base that will still make purchases under your ownership. As a startup owner, it can be hard to spread the word about your new business, so it can be beneficial to buy a business that people know about.
The Cons of Buying an Existing Small Business
1. You’ll Get What You Paid ForFew business owners are going to sell a flourishing business for a cheap purchase price. If a business is thriving, the previous owners will likely demand a hefty price so that they receive a solid return on investment, which is understandable. Due to this, you should closely compare the startup costs versus the cost of buying an existing business. In the long run, you might save money by establishing your own business and brand, but it’ll ultimately depend on the quality of the existing business. On the other hand, if you buy a cheap business, there’s a risk that the brand is tainted, or that markets have rejected the product or service. Resuscitating a bad brand or a struggling business can be very difficult. In such cases, you should ask yourself if the business is worth acquiring even at a very affordable price.
2. Significant Operational Changes May Be NecessaryYou may purchase a business hoping that it’s essentially a turnkey establishment but end up dealing with a wide range of issues. It’ll be hard to examine how well the business is operating until you get behind the wheel yourself. Some warning signs to watch out for:
- Staffing problems, such as disgruntled employees or frequent turnover.
- Equipment that is outdated or prone to issues.
- Unreliable suppliers
- Existing debt or cash flow issues.
3. You Could Get ScammedIn addition to existing issues, you may get scammed by unscrupulous sellers. It’s possible that the previous business owner misrepresented financial data, glossed over needed repairs, or didn’t provide a complete picture of the overall operations. In this situation, you may have legal recourse, but legal fees can quickly add up. To avoid getting scammed, review all legal documents with your lawyer, and conduct considerable research prior to buying an existing business. It may also be beneficial to hire a business broker to help you navigate the buying process. They can help you research businesses, review your letter of intent, and facilitate negotiations.
4. It Can Be Challenging to Make It “Your” BusinessWhen you buy an existing business, you’re stepping into someone else’s vision. Most likely, you’ll have to work to make it your own business model, and make changes that reflect your goals. For example, you may want to make the following changes:
- Offer new products/services
- Change up the décor
- Invest in branding updates
- Revise the operational structure