Starting up versus buying up: What’s right for you?

There are two ways you can become a business owner.

 

You either:

  1. Create and establish your own business that you build from scratch or
  2. Buy a business to shape and build.

When we think of start-ups, we usually focus on the first option. You see a problem, find a solution and invest your time and energy in converting that solution into a saleable product or service.

 

But you can also be a start-up in the sense of becoming a business owner for the first time, with an existing business.

 

Which one you choose, will often be dictated by the reason why you want to be a business owner? Is it to:

  • build wealth and gain a financial return
  • satisfy your creative or entrepreneurial flair
  • improve your lifestyle or work-life balance
  • to solve a problem and pursue excellence in your industry?

The timeframe to achieve your objective can vary depending on whether you establish or buy an existing business, and there are pros and cons to both options that you should consider.

 

Here are some of the key considerations and issues you should research to make your decision:

  • Freedom – When you establish your own business, you get to build it the way you want from scratch, instead of having to try and shape an existing business that isn’t quite right.
  • Risk – There is a fair degree of risk associated with establishing a new business. On the other hand, with an established business you already know it works.

    It’s been proven there is a market and the market has hopefully paid a fair price, providing a good profit margin and importantly a return on investment to the owner.

  • Ability to obtain finance – A business with a proven track record can find it easier to obtain finance. Banks can look at an established business’ track record and lend on that basis rather than unproven projections.
  • Cost – You need to compare the cost of starting a business, against the cost of purchasing a business. An existing business will have a price tag commensurate with the infrastructure, processes, systems, staff, customers and goodwill that buying the business comes with.

    On the other hand, there are many costs associated with purchasing all the things you need to establish a new business, as well as the opportunity cost of foregoing income initially until the business can afford to pay you.

  • Cashflow – Arriving at a positive cashflow position for a newly established business is a milestone, and it can take some time to arrive at that point.

    When you buy a business, cashflow is generally immediate, allowing you to service debt you obtain to buy the business and providing some form of salary for the incoming business owner.

  • People – Staff that come with a purchased business are familiar with the business, product and customers. They’ve already been trained and can run the business or important elements of it. This allows the new owner to focus on the areas they need to address, better manage their own work hours and achieve balance if that’s important to them.

Buying a franchise is another option to establish a “new” business in a new location, while taking advantage of the existing knowledge, systems, brand, suppliers and support network of a franchise group.

 

However, given the rules and expectations outlined in most franchise agreements, you’ll find you might not have the degree of control or freedom over the decisions you make about your business.

 

While there are many positives associated with buying an established business, it’s important you perform due diligence to identify any risks and ensure you’re not picking up a “red herring”.

 

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