Buying an Existing Business Vs. Starting One From Scratch

Keiran James

Keiran James is a Registered Business Valuer (RBV) and the co-founder of BusinessSales.com.au.

Keiran has a Business and Commerce degree from the University of Newcastle and prior to BusinessSales Keiran worked as an Investment Advisor to High-Net clients investing in domestic and international shares and as a buyers agent helping business owners get into business and expand through acquisitions.

Table of Contents

Introduction

Owning a business is something that many Australians aspire to do since it may present an opportunity to earn more money, have greater independence over their work, or even pursue greater opportunities that might otherwise be available.

To actualise the dream of owning a business you can either buy a business or start one from scratch. The decision of whether to buy an already existing business or start one from scratch is determined by both financial and personal issues.

New businesses almost always encounter problems along the way that slow down their progress or even put their future in jeopardy. Still, it can be quite exciting to start a business and see it grow. On the other hand, it is often easier to obtain financing to purchase an already existing business that has cash flow and assets as compared to securing capital for starting a business.

For a first-time entrepreneur, it can be overwhelming to start a business from scratch. If you have an amazing business idea and are willing to put in the work to build it from the ground up, then starting your own business can be an excellent idea. If you want to avoid some of the common pitfalls associated with new businesses and hit the ground running, then it makes the most sense to buy an already existing business.

Buying A Business vs Starting One from Scratch: Pros and Cons

To help you determine which option is better for you, here are the pros and cons of buying a business vs. starting one from scratch:

Starting Your Own Business

Pros

You are not bound by somebody else’s history, rules, or assets: If you start a new business, you won’t have to worry about resolving any issues left by the previous owner. You will also not have to fix any brand image problems or even have to boost any sullied reputations. You will also not have to deal with any long-held grudges.

You have the freedom to manage the business as you please: When you start a new business from scratch, you are essentially painting on a blank canvas, which means that you have the freedom to do as you please to ensure that it is successful.

You have the opportunity to carve out a new niche in the market: New businesses almost always get the most attention since consumers tend to find them more intriguing. If that intrigue is combined with a great product/service and marketing, success is almost guaranteed.

Cons

It is a lot of work: Running any business is a lot of work, but successful new businesses require a significant investment of time. You might find yourself sometimes putting in 100+ hour work weeks, which can be quite the challenge for even the most passionate and determined entrepreneurs.

It can be more difficult to secure financing: Unless you are willing to struggle through the first few years or are already independently wealthy, a new business will require significant funding. Unfortunately, securing funding for a new business is not so easy considering that all you have is an idea and perhaps a prototype product to bring to presentations.

Success is not guaranteed: Most new businesses usually fail within the first few years of operations, which means that the risk of failure is considerably high. Working under such high risk can easily derail your vision, which means that you can fail to seize opportunities in the market or even attract experienced and competent staff.

Buying an Existing Business or Franchise

Pros

You can hit the ground running: If you buy an already existing business, you will benefit from the work that has already been done building a brand, acquiring business assets, developing business processes, and developing relationships with business customers. It is actually possible to take over ownership of the business and generate profit in your first month, which is usually not the case when you start a business from scratch.

You are exposed to less risk: If you buy an already existing business or a franchise operation, there’s less financial risk involved, which makes it a safer operation for a potential business owner. Providing that the business is doing reasonably well, it is safe to assume that it will continue doing so. In contrast, starting a business from scratch is jumping into the unknown when it comes to financial risk.

It is easier to access financing: Financing is usually a key challenge for most small businesses, but it is much easier to navigate when you buy an already existing business. Lenders are more likely to provide business loan financing for the purchase of already existing businesses since there’s considerably less risk associated with lending to a business with a proven track record and existing cash flow.

It is usually easier and faster to scale the business: Especially if you buy into a franchise, the work involved in buying and running a second or even third location is considerably less than it would be to build a business from scratch and expand to two or three locations, and you can probably do it much sooner too.

You are buying into an already established brand: If you decide to buy an already existing business, you are buying into an already recognisable brand that has a track record that’s complete with all the intellectual property such as websites and trademarks associated with it. This gives customers, lenders, suppliers, and other contacts confidence in the business that they might not have when interacting with a newly established business. Moreover, an established brand is highly likely to have a current and future demand for its products or services.

Cons

You are stuck with the previous owner’s mistakes, business model, and way of doing business: Whether it is customer service problems, unpaid debts, poorly maintained equipment, or inefficient business operations, the previous owner’s mistakes are now your problems. Fortunately, it is possible to avoid most of these problems if you do your due diligence before finalising the transaction.

It can be challenging to properly value the business: While the experts who value businesses for a living are very good at what they do and will probably be spot on more often than they aren’t, it is still quite challenging to properly determine the true value of a business. No matter how thorough and knowledgeable you are, there are too many factors to consider. It means that you might end up finding out that the business you purchased is not worth what you actually paid for it.

You will probably have to make significant changes: It can be hard to really determine how well a business is operating when looking from the outside in. If you come across any problems, you might find yourself having to make significant changes. Unfortunately, as you are implementing those changes, you might find yourself creating new problems. To avoid finding yourself in such a situation, it can be a good idea to find out as much as possible about the existing business so that you don’t regret your decision.

Which Option Should You Choose?

Owning a business is a very exciting thing for many Australians. Starting a business from scratch and buying an already existing business are both paths you can take to own your own business.  

The decision regarding which option to use will depend on your financial goals, dreams, and personality and an in-depth assessment of the pros and cons of each approach as discussed above.

More and more though entrepreneurs and business owners are choosing to buy existing businesses as the advantages often outweigh the disadvantages.

If you’re considering buying a business you can find businesses listed for sale here.

Next Steps

When you are dreaming of owning your own business it can be easy to get stuck waiting for the perfect business.

BusinessSales’ purpose-built platform delivers a tailored and transparent experience from the time you first consider business ownership, right through to handover.

For more information about how we help buyers check out our buyers page.

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