Toronto business and technology lawyer, Sukhi Hansra, of Hansra Law, discusses the main benefits of buying an existing business as opposed to starting a new business from scratch.
Should You Start a New Business or Buy an Existing Business?
When most prospective entrepreneurs think about starting a new business, their first thought is often to start a business from scratch – develop your own ideas, finance it with personal savings and build a company from ground up. While starting a new business can be an exciting venture, there are several distinct disadvantages to starting from scratch. New businesses require a significant investment of time and money, and you may be unpaid in the beginning. Building a solid customer base is a long-term journey and other times you may experience difficulties with hitting your break-even point (the point where your revenues are equal to your cost, so your business is now generating a profit).
Instead of starting a new business, a great first step is to investigate the numerous opportunities available for existing small to medium-sized businesses. In most cases, buying an existing business is less risky than starting a new business. You can immediately assess the past financial performance of the business, the solidarity of its client base, upfront investment costs (the purchase price) and employees. Most importantly, you will have the benefit of an established brand and reputation which you can leverage to launch your business forward.
The Benefits of Buying an Existing Business
- Easier to secure financing. Banks are more likely to finance the purchase of an existing business as compared to funding your new business idea. This is because existing businesses have proven that they are viable in the market, are generating revenues and profits, and have an established customer base. Existing owners can also help finance the purchase of their business by providing vendor financing.
- Immediate Cash Flow and Profits. The best existing businesses already have a solid track record of sales and profits. A new venture, on the other hand, can take a while to build revenues and become profitable, which poses a higher risk for both you and the bank. According to Innovation, Science and Economic Development Canada, only about 50% of Canadian start-ups are still operational after five years, and this is often due to cash flow issues. Reliable income from the start helps bring consistency to your finances and future business planning.
- Established Customer and Supplier Network. A loyal customer base is the heart and soul of any business. However, building a solid client base can often take years for many businesses. When buying an existing business, you can focus your efforts on better serving your existing customer base while bringing in additional customers. Often overlooked is the supplier network that supports an existing business. Healthy supplier relationships help bring better value to your business through lower costs, better problem resolution and more flexibility. Building strong supplier relationships in a new venture can take significant time and effort.
- A Reputation to Build Upon. A business can only turn a profit of it can bring in customers, and bringing in customers requires a solid reputation and brand. The goodwill of a business determines why your customers come to your business instead of your competitors. Existing businesses have already established that goodwill. As the acquiror of an existing business, you can immediately leverage the current goodwill of the business to build an even stronger reputation. When buying an existing business, the purchase price is largely determined by the current customer network and brand reputation.
Conclusion
Although these are great starting points to consider when deciding to purchase an existing business, there are several other key considerations to keep in mind, such as the accuracy of the valuation, management and employee performance, the fit and business plan.
A good first step would be to speak to someone who has been through it, or someone who has helped others purchase and sell businesses – such as an Accountant or Business Lawyer.
