Small Business

Should You Buy a Business or Start One from Scratch?

Deciding between buying a business and starting one from scratch is not easy. There are pros and cons to both options, and many successful entrepreneurs have risen from both paths. If you’re deciding whether to buy a business or launch one of your own, here are a few important questions to answer.

How much time do you have?

Time is a finite resource that is oft an enemy of entrepreneurs. When it comes to business ownership and deciding between buying and launching, it’s important that you consider how much time you have and how much you are willing to devote to your business.

The Argument for Buying a Business

As it relates to time, entrepreneurs that want a quick return on their investment should consider the acquisition route. Starting a successful business can take a lot of time and the path to profitability can be long. Buying a successful business that is already profitable saves you the time that it would take to build a brand and generate a client base from scratch.

The Argument for Starting a Business

If you have time to devote to a new business, starting one from scratch is worth the consideration. Not only can you feel the reward of building your own product and brand, but you can play an integral part in developing the culture, hiring employees, and creating the values of your company and marketing message. When you purchase a company, you inherit the brand, history, and other identifying factors.

How much money are you willing to invest?

Buying a new business or starting one from the ground up will both cost money. Your total cost for buying and building a business will depend on the industry and type of product or service you intend to offer.

The Argument for Buying a Business

Buying a business can take a substantial investment. This is particularly true the more successful the business is. The list below, from Fit Small Business, estimates some of the average costs of buying businesses in popular U.S. small business sectors.

  • Landscaping and Yard Services – $128,500
  • Restaurants – $128,750
  • Bars/Taverns – $195,000
  • Gasoline Service Stations – $252,500
  • Supermarkets – $270,000
  • Health, Medical, Dental – $325,000

As you can see, buying a business can be costly and varying. Even within an industry, a business can be more or less valuable than another. The reason buying a business is so costly is because you are, hopefully, buying a successful business that will return a value greater than the purchase price. When you buy a business, you buy its clients, its employees, its assets, its brand equity, and all other factors that make that company successful.

It’s important to conduct a professional business valuation before you purchase a company so that you are not overpaying for the company. In the end, you will spend more, on average, buying a company than building it from scratch, but it is usually a much safer path to owning a successful business.

The Argument for Starting a Business

The U.S. Small Business Association (SBA) estimates that the average cost of starting a business from scratch is $30,000. This is substantially less than the average cost of buying a business but is still a large financial risk. If you want to become a business owner without taking out a large business loan, starting from scratch may be the best option.

There are many low-cost options for starting a new business. You can create a sole proprietorship where you own and operate your entire business from home. You can find franchise opportunities. You can also set up a web-based storefront to facilitate your business and test your market. Starting a business can be a much more affordable option for people looking to own a business.

Have you conducted proper research?

Regardless of whether you buy or build, you should be ready to spend a great deal of time researching before making your decision. Researching relates to the industry in which you want to operate, the company you’re considering purchasing, the processes, and operating workflows, and the product or service you intend to offer.

The Argument for Buying a Business

Researching a business is a no-brainer before buying. You need to check its accounting books to properly valuate the company, you need to assess the employees, and you need to research the client base and company history to know exactly what you are buying. Even though it will require a lot of time, money, and other resources, properly researching a company and conducting due diligence is the only way to prevent overpaying.

When researching the company, it’s important to ask as many questions as you can. Find out exactly why the owner wants to sell the company. Ask what challenges and opportunities are present in the industry. Spend time chatting with employees so you can better understand their workflow. The more research you conduct, the safer your investment will be.

Buying a business is much easier to research than starting one from scratch because you have historical data on which to base your decision. Starting a new business does not have the same data to validate your decision, which makes it riskier and harder to research.

The Argument for Starting a Business

As mentioned above, it’s much easier to research a business that you intend to purchase than the one you would from scratch. The research available for new businesses is public data, like 10-K reports, industry research papers, and other information you find through primary or secondary research.

Just because it’s easier to research an existing company doesn’t mean you should neglect to research your business idea. In fact, research can prove to validate your idea, lead you to a blue ocean, and improve your new company’s workflow.

If you buy a business, you acquire their current workflow processes, supply chain partners, and other assets like machinery, trucks, etc. When you start your own business, you can conduct research before launching to find the most efficient, cost-effective, and productive processes, partners, and assets to complete your product or service with the most optimal bottom line.

How will you market your product or service?

Simply put, most industries are becoming oversaturated and crowded with competition. As globalization continues, this fact will become more and more apparent. Thus, marketing grows in importance. Before you ever buy or launch a business, you need to strongly consider how you intend to market it.  Do you plan to deploy an online marketing strategy? Do you want to focus on localized, word-of-mouth marketing? Marketing a business is crucial, and whether you buy a company or start your own will create different challenges and opportunities.

The Argument for Buying a Business

When you acquire a business, you also inherit their marketing assets. This includes their social profiles, email lists, client phone numbers, and other advertising collateral. One of the main benefits to purchasing a business is that if they were successful, they likely had a strong marketing strategy in place. Having an established client base and marketing when you buy a company makes it much easier for you to sustain the growth trajectory of that company.

It’s a good idea to test the marketing of a company before you purchase it. Try completing their online form and see how long it takes for someone to contact you. Do they send automated follow-ups or is it customized? Does a professional and friendly salesperson contact you via phone? By putting yourself into the lead funnel and watching the marketing efforts first-hand, you will have a great understanding of what your future customers will experience.

The Argument for Starting a Business

Buying a business might make it easier on the marketing, but it doesn’t always make it better. In fact, just as you acquire the good marketing factors, you also inherent the bad. This means, you could acquire a company that has received negative online reviews or you may inherent social media profiles that are not responding to customer feedback. You are also boxed into the brand style and marketing identity of the company you acquire. Changing the logo or the brand message after purchasing could cause a backlash, confusion, and more headache than its worth.

Thus, starting a business from scratch means you also get to build the marketing identity from scratch. This creative freedom gives you and your team complete control of your brand. You also have more flexibility to decide on which marketing channels you want to your build your message. You can try content marketing, SEO, radio commercials, brochures, or gorilla marketing to get your message out to your target audience.

Deciding whether to buy a business or start one from scratch is not an easy decision. However, if you’re able to answer the questions above, while understanding the pros and cons associated with buying and building, you’ll be on your way to owning a successful business in no time.

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