Every business I have personally owned has been built from the ground up. They were all startups, birthed from an idea I had that I felt could solve a pain point in the marketplace. Sometimes I was right, sometimes I was wrong. My father on the other hand experienced both building a business from scratch and he bought a business out of foreclosure (quite literally; on the courthouse steps). If you were able to ask him (he is no longer alive) whether it was easier to buy a business or start one I truly believe he would say it is easier to buy a business.
Whether you buy a business or start one really comes down to a variety of factors. There are so many things to consider that I could write an entire book on the topic. Today, I am going to focus on some of the earliest things to consider.
Factors to Consider - Buy a Business or Start One
Most of the entrepreneurs I work with are starting brand new businesses. I suspect that has a lot to do with the societal psychology that has been built up around entrepreneurship. Today’s entrepreneurs are modern-day rockstars.
I’m hoping that you will set that imagery aside and focus on making the decision that best suits your personal situation. Because both paths, buying a business or starting one, are somewhat dependent on just that, your personal situation.
Your Personal Toolbox
You could relish the idea of being the next Elon Musk. However, if your personal experiences, knowledge, and skillset are missing some of the key components he exhibits then it isn’t going to happen. For example, if you lack a strong engineering background it is highly unlikely that you could accomplish as much as Elon has. Sorry, no rockets for you.
The same holds true for buying an existing business or starting one from scratch. My father’s first business venture on his own was successful because he had first-hand exposure to launching a brand new business as another entrepreneur’s #2 guy. If you have never been exposed to starting a business from the ground up then it might be smarter to buy an existing business.
Starting a business allows you to tailor that business to the things that you are best at and leave out anything where you don’t, or can’t, excel.
Do You Need Proven Processes?
Early in my first business venture, I failed to recognize the importance of having policies, procedures, and processes in place that would allow me and my team to execute more efficiently. That cost us a lot of energy, money, and time.
One of the benefits of buying an existing business is that those things are already in place. Or, at least they should be. This is particularly true of buying a franchise. In fact, that is a large part of the value of buying a business that is a franchise is that they should have proven processes in place. It should be largely “plug and play”.
Your Risk Tolerance
In general, the failure rate of small businesses is pretty high. Some put it as high as a 70% failure rate. Buying an existing business should reduce your risk. The beauty of buying an existing business is that you have the opportunity to review its financial position and other factors about the business that should point to its level of success to date (such as reviews, etc.).
Startups, especially those that are attempting to launch unique business models, take a long time to gain traction. Simply because there is a cost to educating the market about why they should care about your product or service.
If you don’t have a high-risk tolerance buying an existing business is most likely the best path for your entrepreneurial endeavors. Even if the business is not performing at its peak, there is still a foundation to build off of in the beginning.
Assuming that you are buying a business that has been performing well, it is going to cost you more to buy a business, in most instances, than if you started your own from scratch. That’s because when you buy a business you usually pay a multiple of the business’s profit plus the cost of any assets you are inheriting.
If money is tight or you don’t think you can qualify for funding to buy the business then starting your own business is probably best.
The takeaway for you here is not to become so enamored with being an entrepreneur that you fail to consider all of the paths available to you. Startups can be very exciting and rewarding. They are also extremely challenging to grow. Sometimes the best option is to buy an existing business where you can improve upon its performance.
Next week I plan to talk about the things to consider when buying an existing business.
Whether you are looking to finance the purchase of an existing business or start a new one my courses can help! Click the appropriate button below.