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The Benefits of Buying vs. Starting a Business

August 8, 2012

An existing business already has a base of revenues to build upon.So you want to be your own boss.  Consider the options – starting your own business vs. buying an existing company. Starting a business of your own can pay great dividends, but it’s important to understand that the risks are significant.  According to Michael Gerber, author of The E-Myth Revisited, 40 percent of new businesses fail in the first year and 80 percent fail within five years.
On the other hand, purchasing an existing business reduces an entrepreneur’s risk while creating opportunities for tremendous profit.

There are a number of reasons to consider the purchase of an existing business rather that starting one:

  • Risk.  An established business with strong cash flows is far less risky than a startup.
  • Branding. The ongoing benefits of any marketing or networking the prior owner has done will transfer to the new owner.
  • Proven Concept.  A business with a track record is more likely to qualify for credit.  A bank can rely on historical financials, not just projections.
  • Key Personnel.  The employees have already been trained and assimilated into the company culture. You will have an easier time implementing growth strategies.
  • Focus.  The seller has already laid the foundation and taken care of the time-consuming, tedious start-up work. You can focus on improving and growing the business immediately.
  • Goodwill/Relationships.  You will have an existing customer base and vendor base that took years to build.  It’s very common for the seller to transition with the business for a short time to transfer those relationships to the buyer.
  • Cash flow. Typically, a sale is structured so you can cover the debt service, take a reasonable salary, and have some left over to take the business to the next level.  On the other hand, start-up businesses aren’t expected to profit for the first three years.

Becoming your own boss always involves a risk.  When you buy a business, you take a calculated risk that eliminates a lot of the pitfalls and potential for failure that come with a startup.  “Working for someone else is trading time for money, but doesn’t build equity. As an entrepreneur, you are the master of your own destiny.”

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