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The Pros and Cons of Buying an Existing Business
July 18, 2018
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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 business.

Still, while there are many benefits to buying an existing business, certain risks will increase as well. In this 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.

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 try to start your own retail store from the ground up, you’ll need to purchase inventory, find suppliers, hire employees, and find a location.

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.
  • You’ll have access to an established customer or client base.

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 upgrade equipment, to name a few examples. Still, many tasks will already be completed for you, 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 information 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.

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 price. If a business is thriving, the previous owners are going to 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 issues 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.

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.

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.

Conclusion: There Are Many Benefits, 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 business’s industry, 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!

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].
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