The entrepreneurial urge is a powerful one. Entire tomes have been written about people who have started their own businesses and risen to the heights of success.
But the simple fact is that not everyone has the time, dedication, or wherewithal to build a business from the ground up. Fortunately, there’s another way.
One of the more common ways to scratch the entrepreneurial itch is to acquire a company that already exists. There are actually a number of advantages to buying an existing business.
Of course, running your own business is no easy feat, regardless of whether the company existed before you became the owner or not. Entrepreneurs are required to deal with a broad range of challenges, work late into the night, and use many different skills.
Depending on your personality and experience, it may make more sense to build a company from scratch. For others, buying something that already exists and working to improve and grow that business may be the better option.
Whichever path you choose, it should not be a decision made lightly. We’ll go through some of the biggest pros and cons of acquiring an existing business to help you make that decision.
Do Your Due Diligence
When you buy an existing business, you know that the product or service has already been market tested. For example, if you buy a company that provides aluminum siding that is already popular in the region, you’ll know that the level of service is good and people are happy with the work. So you can be relatively confident that people will continue calling the business.
Establishing whether a business is doing well before you buy it is part of the crucial due diligence process. If you’re looking for businesses for sale, you must take into account whether it’s already successful and that means doing a lot of research.
Acquira’s Acceleration Gauntlet helps entrepreneurs through this diligence process, learning how to find deals, and then determine whether they are worthy investments or should be disqualified.
Before you acquire any company, it’s important to know how successful the business is or whether it has any hidden problems that may not be obvious at first. The only way you can know all of this is through careful examination.
Advantages of Buying An Existing Business
Building a business from the ground up takes a certain type of temperament. It’s not for everybody. But if you’ve got the gumption and the means, it can be a great way to get a running start at business ownership.
When you buy a business that’s already established, there can be many advantages. Of course, every venture comes with pros and cons, so let’s dive in.
Reduced Start-Up Time
In the event that you choose to acquire an existing company, you’ll be able to get up and running more quickly.
If you were to start your own roofing company, you would need to buy a truck, buy all your tools and equipment, hire employees, and make sure they’re trained and properly certified. All of that before you can start marketing your business and attracting new customers.
If you buy an existing roofing company, your employees are already trained and certified, they’ve got all the necessary tools and supplies, and they have vehicles to get to the job sites.
Here is simple rundown of tasks you don’t need to worry about when you buy an existing business:
- Employees are already trained.
- All of the licenses have been sorted out.
- There is already a relationship with existing suppliers.
- Certain procedures and systems have already been put in place.
Moreover, if a management team exists, they will be a great resource to draw upon while learning the ropes.
That’s because when you buy a business, the previous owner already did most of this work for you. As you’ll want to grow the business, you’ll likely start to implement your own systems and improve existing processes, but when acquiring an existing business much of that work has already been done for you.
Because so many of these initial tasks have already been taken care of you, as the new owner, can concentrate on your growth plans and making the business your own.
Better Financing Options
One of the nice things about acquiring an existing business is that you actually receive better terms on your debt, especially traditional financing, that you use to purchase the company.
In fact, if you need a loan to buy a business, it may actually be easier to get than a loan for a startup venture. On top of that, the application process tends to be more streamlined and less stressful because the bank or lender can review the existing company’s finances.
Banks can look at the company’s past revenues and profits, as well as other financial information, to decide whether the company is a good investment. This helps reduce risks for any lenders and increases the chances that they’ll give you a loan in the event that the business is already healthy.
One of the biggest costs of starting a new business is associated with finding new customers. A lot of time and funds go into marketing and advertising at new companies.
However, if you buy an existing company, it already has a company base built-in. Ideally, these customers will continue to use your services or buy your products even under new ownership.
Startup owners often find it difficult to get the word out about their new business. Existing companies largely don’t have that new problem. Hang an “Under New Management” sign and you’ve already done most of the work toward informing your current clients.
Disadvantages Of Buying An Existing Business
While there are a number of positives to buying a business, it’s not all sunshine and SBA loans. Like most things in life, there are some potential downsides that you need to consider before making the leap and acquiring an existing business.
While you may save money in one area, it may cost you more in other areas. Therefore, it’s important to have a complete understanding of the process and any disadvantages you may face as a result of buying a business.
Research is key here, and you can’t rely on only the information that the current owner gives you. Make sure to talk with existing customers and vendors to see what they think of the business and their experience with the people that work there.
Make sure you find a qualified financial advisor to look over all of the information you receive from the current owner. These advisors will also be able to guide you on prices and other best practices.
As we mentioned earlier, Acquira’s Acceleration Gauntlet is a great tool for helping you recognize bad deals.
Here are some potential drawbacks that may come from buying an existing company.
High Initial Costs
Even with good debt terms and more access to loans, it’s likely that you’ll stay to pay a lot of money up-front to buy a company. Even companies in relatively inexpensive sectors like e-stores and dropshipping companies come with a cost. When you start looking at bigger home services businesses, those costs rise exponentially.
In fact, buying an established business can cost more than if you were to start the company yourself and build it up from scratch. And if the business you’re buying is well established and profitable, it’s going to cost more than risky investments or fixer-uppers.
While companies that require some attention and improvement can offer a great opportunity for growth, buying a room full of new computers for everyone is a heavy cost to eat right out of the gate. When starting your own business, you can start small and work your way up, spending more as you grow to improve operations.
Changes Will Be Necessary
While some companies may be turnkey operations that you simply purchase and watch the money roll in, many won’t be. Most of the businesses that are on the market will need significant changes if you want to boost productivity.
The main drawback here is that this can be difficult to analyze until you’re actually running the business yourself. You can look at financial reports and interview the current owners all you want, but until you can actually peak under the hood to look for inefficiencies you can’t know what needs to be fixed.
Some specific areas that often need changes:
Dated Processes and Technology
When a company is successful, it often doesn’t look too closely at the processes and technology that it uses. It’s the “if it ain’t broke, don’t fix it” mentality.
But the truth is, these processes, systems, and technology can become outdated. Of course, the good news there is that you can create efficiencies and find new profits. The bad news is that it will cost you.
Try to ask the seller about their current systems and organization chart before buying. If the technology or tools they use appear outdated, you’ll need to work this into your costs for acquiring the company.
Sometimes, these outdated systems can be so ingrained within the business that it may just be easier to start a company from the ground up.
Adjusting Existing Company Culture
Just as systems and processes can become entrenched, so too can bad work habits and negative work cultures.
If a company has a culture of long breaks and liberal sick days, it can be hard to break the workers of those habits. And those habits can be costly.
Likewise, if a company has a bad reputation, it can be difficult to shake. If you acquire a company that is known for shoddy or slow work, whatever deal you receive may not be worth it. The cost of turning that reputation around may require too much of an investment.
Before you drop your life savings on an established company, you should consider how much work it will take to reshape any negative parts of the company’s culture or reputation.
What You Should Consider Before Buying An Existing Business
Before you acquire a business, there are many things you should consider. This should happen before you begin due diligence.
Decide what type of company you want to run and make sure it’s something you can see yourself doing every day. If you’ve never bought a business before, Acquira offers many resources to help prepare you.
But before you buy, try and determine why the owner is selling the company. There are many legitimate reasons for someone to sell their company (retirement, illness, other business opportunities, etc) but if they’re trying to sell a failing company, you definitely want to steer clear.
Conclusion: Buying An Existing Business Advantages and Disadvantages
There are many pros and cons of owning a business, whether it’s one that existed previously or one you’ve built up from scratch.
But if you’re looking for a relatively quick way to enter the entrepreneurial world, acquiring a business that already has an established presence, a built-in customer base, and trained workers is a good way to go.
Any route you take will require a lot of work, time, and dedication. But if you’re able to find an already successful business that can be improved upon, you’re beginning with a head-start.
For anyone who’s thinking about starting the entrepreneurial journey through an acquisition, Acquira is here to help. We offer training, financial advice, and a community of like-minded people to help you through the process.
If you’re having trouble finding financing, we have many qualified partners who can help walk you through the SBA process.
Try signing up for our Acceleration Gauntlet to see if it’s a good fit for you. If you’ve already completed the Gauntlet, you should schedule a call with us to discuss your next step. If you’ve already acquired an existing company, we’d love to hear about your journey in the comments below!