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The Pros and Cons of Buying an Existing Business
January 18, 2019
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The Pros and Cons of Buying an Existing Business

Starting a small business can be a rewarding opportunity. You can pursue your entrepreneurial dreams and build a successful company from the ground up. Still, this isn’t for everyone. Rather than starting your own business, you could instead purchase an existing one. Buying an already established business will allow you to avoid the often painful startup period, while still allowing you to run a good business.

Still, while there are many benefits to buying an existing business, certain risks will increase as well. In this blog post, we’ll examine the pros and cons of buying an established business, so that you can make the best decision for your individual needs and experience.

The Pros of Buying an Existing Business

1. The Product or Service is Already Market Tested

When 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 a restaurant that’s well-reviewed and is producing good sales numbers, you’ll know that local customers already enjoy the food.

Due to this, it’s important to conduct your due diligence; knowing that the product or service is already well-received should play a part in your final decision.

2. You’ll Significantly Reduce Startup Time

Not 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 from scratch and want to open a retail store, you’ll need to purchase inventory, find suppliers, hire employees, and find a location before you open your doors to customers.

In comparison, many of the following tasks will already be established when buying an existing business:

  • 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.

When you buy a business, the previous owner will have already done much of the work for you. Of course, you may need to hire additional staff members, remodel the location (or look for new real estate), and upgrade equipment, to name a few examples. Still, many tasks will already be completed for you as the business buyer, allowing you to focus on improving aspects of the business and making it your own.

3. The Brand Is Established

Brands 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. Many entrepreneurs struggle to grow their brands and draw attention to their products or services, especially during the startup phase. Still, over time your 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 Financing

It’s often easier to obtain additional working capital, especially traditional financing, for an established business. 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 risks for lenders, and if the existing business is healthy, it will increase the likelihood that they’ll lend you money.

5. Access to the Business’s Customer Base

Since 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.

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The Cons of Buying an Existing Small Business

1. You’ll Get What You Paid For

Few 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, 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 Changes May Be Necessary

You 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.

Unfortunately, as you try to implement changes, you may end up creating new problems. For example, employees may resist policy changes and even quit. To avoid these issues, we suggest trying to find out as much about the existing business as possible, so that you don’t regret your decision.

3. You Could Get Scammed

In 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.

4. It Can Be Challenging to Make It “Your” Business

When 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, and make changes that reflect your goals. For example, you may want to offer new products/services, or change up the décor.

Unfortunately, these changes can cost time and money. In some cases, the business may never feel like it’s truly yours, because you didn’t start it. If you worry that this could be a possibility, you might be better off waiting until you’re able to start your own company.

5. The Business Might Have a Bad Reputation

If the business has experienced PR issues; it could hurt your sales going forward. From bad customer service to legal troubles, these mistakes might damage your entrepreneurial career, even if you didn’t open the business when they occurred. If patrons already associate the business with negativity, they might not change their mind because there’s a new owner (or, they might not even find out about this). Even if there are other benefits to buying an existing business, purchasing one with a less-than-stellar reputation won’t make them worth it.

Conclusion: There Are Many Benefits to Buying an Existing Business, But Also Some Drawbacks

There are many pros and cons to buying an existing business. Whether you should do so will depend heavily on your situation, financing options, and the type of business, to name a few examples. We suggest taking time to consider all your options prior to making a permanent decision, so that your business venture is a rewarding one!

Editor’s Note: This post was updated for accuracy and comprehensiveness in January 2019.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].