If you have plans to become a business owner, one option to consider is purchasing an existing business. This is a big decision, and as industry experts like Ryan Binkley Generational Equity will no doubt advise, there are important advantages and disadvantages which need to be carefully considered if you are thinking about buying business.
One the potential advantages of buying an already-established business is that the hard work to establish a customer base – ideally of repeat customers – has already been done. Depending on the nature of the business, this may mean that you will also be purchasing contracts that have already been negotiated with customers. However, there is a potential downside as well. Especially in service-oriented small businesses, it may be the case that customers are loyal to the business owner (who perhaps has personally provided the service in the past) rather than the business itself.
On the positive side, purchasing a business generally means that there is already a staff in place. This means that you don’t need to worry about hiring and training issues, and it also means that you have an important resource in terms of expertise and institutional knowledge. You also benefit from the relationships that your staff have established with customers and other relevant businesses. However, there is a potential disadvantage in that many staff members may decide to leave for any number of reasons after you have purchased the business, and may be entitled to benefits or severance packages that you will need to pay for.
If the business you are purchasing has a good reputation, this is something that can benefit you once you take it over. There are no guarantees, but in general you should expect to receive goodwill from customers and other relevant players. However, if the company you are purchasing has a negative reputation this can be difficult to overcome – especially if it is something that you did not know in advance.
Contracts and Agreements
While it can be reassuring to have already-signed contracts and agreements in place, you could find that this limits your plans in unexpected ways. This can include supplier agreements, sales contracts, and property rentals, all of which you may have planned for. But it can also include things like utilities service agreements, cell-phone or internet plans, payment systems, domain names and any number of other agreements that on their own are not significant but which can add up quickly.
An advantage of buying an established business is that you have the opportunity to evaluate the price against a set of knowns – you know that the business has been successful, you know about existing agreements, assets, and projections. A disadvantage is that the price for the sale will be higher than the costs of starting the business from the ground up; it may also be based on intangibles that fail to materialize or on income projections based on market conditions that change after the purchase.
Whether you decide to start your own business from the ground up or take over an existing business, there will be advantages and disadvantages. Be sure to do your research so that you can make the right decision for you.