So, you’re ready to own a business. Of course, your first and foremost determination should be in regards to what kind of business you’d like to run. Once you have made that decision, the next question to ask yourself is should I start a new business or buy an existing one? This article presents some key reasons why purchasing an existing business is recommended over starting your own from the ground up.
One of the biggest advantages of purchasing an established business instead of starting a new one is proven cash flow. You can look at the books and see for certain what kind of money the business is making. That is a lot less risky than starting a new business not knowing if you will make any money at all, let alone turn a profit. With the knowledge of how much money a business is actually generating, you can more easily budget for paying your personal and business expenses.
A successful established business means you can start running your own business profitably right after closing the deal. Starting a new business is inherently risky, and around 20% fail in their first year. Plus, when it comes to securing financing, an established business that is already turning a profit is easier to find funding for versus raising capital for an untested business idea that has a higher likelihood of failure. You can take past records and financial statements to a lender to show that the business is profitable. This makes you a less risky investment and maybe even getting a lower interest rate or more favorable terms for a loan.
When you purchase an existing business, it will already have a team of employees in place who are trained to keep the business running smoothly. When you start a new business, you have to go through the arduous process of hiring and training your staff who may or may not get along and work well together. With an established business, on day one you get a team of people who already know what they are doing. As a result, there will be less interruption in “business as usual.”
A Proven Track Record
When you purchase a profitable existing business, you will already know that the business location is favorable. You can also rest assured that the product or service is desirable in that community and likely to continue to generate a profit. Starting a new business does not offer that sort of security. No matter how good your idea is or how favorable the location may appear to be, there are always unforeseen variables that could prove detrimental to your new business’ success.
An established business already has a variety of important relationships in place that are critical to its success. Your purchase of an existing business means a supply chain is already in place with various vendors. Most likely there are contracts established with those vendors to ensure, at least for a while, that necessary supplies and services will continue. This will allow you to keep conducting the business in a profitable manner.
When you start a new business, you will have to source and secure vendors and contractors for vital supplies and services. This includes negotiating contracts and hoping you have chosen reliable partners to work with. Many new businesses get derailed when contracts fall through, a supplier proves to be unreliable, or they are unable to secure a vital service (like maintenance on equipment).
Glen Herman is Business Intermediary of Creative Business Services/CBS-Global.
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