The decision to go into business for yourself is one of the most exciting (and scary) decisions you may ever make. In this month’s article, the presumption is that you’ve decided you have the experience and qualifications to be a business owner. Now the planning and real work begins - and your first decision will be how to start your business.
There are two basic ways to enter into this venture – by either starting it yourself or buying an existing business. Let’s take a look at the advantages and disadvantages of each.
Buying an Existing Business
In some ways, purchasing an existing business can be the easiest way of getting into this, especially if the industry you are entering is highly competitive or has high entry barriers.
- Established base of customers upon which to build
- Established name recognition among potential customers
- Established source of suppliers
- Established workforce
- Depending on the method of acquisition, established banking relationships
- Established facilities and/or locations
- In short, all items necessary in order to hit the ground running are in place
- May be less expensive if the business has been on a downward path and some or most of the foregoing are not positive
- Cost. Purchase of an existing business can be expensive, especially if it is highly profitable.
- Less than stellar reputation among customers or suppliers
- Workforce that is inefficient or resistant to management changes
- Poor relationship with bank
- Inefficient or outdated facilities
- In short, there may be many undesirable attributes that require correction for the business to prosper
Purchasing a going business, while a seemingly easy route to entering the business arena, is not always the best way to become an owner. It can, in fact, be the worst solution, depending on the company to be purchased. In addition to the above-mentioned list, there may be tax liens and other problems to overcome for a going concern. For this reason, and for tax purposes, it is generally preferable to purchase the assets of a business rather than the actual business entity. This allows you the most flexibility, but you should also make sure you purchase the business name.
Starting Your Own Business
Starting your own business is a difficult and time-consuming venture, even more so than purchasing an established one. There are times, however, that it is necessary - perhaps there is no business for sale in your chosen industry, or the product or service you plan to offer is not available in your area. Even if there is a business available in your area, its reputation may be such that starting from scratch simply makes more sense.
- Ability to control the pace and timing with which the business starts up
- Ability to control the composition of the workforce; build the team you want
- Ability to put in place all policies and/or procedures
- Ability to build a new brand/trade name with the reputation you want
- Cost. While there are many potential pitfalls, the cost of starting a new business is generally less than the cost of purchasing an existing one.
- No established customer or supplier base
- Need to establish workforce from the ground up, including putting in place appropriate policies
- Need to establish new banking relationships
- Need to establish complete business organization from the ground up
- Need to establish trade or brand name recognition
If you haven’t noticed, just about every positive attribute to starting your own business also has a negative. That’s because the startup process is real work and will take a great deal of time and planning before you reach the point of opening your doors.One way to minimize some of the pain of a business startup is to buy a franchise. Typically, a franchise will give you a recognized brand name and a set of operating practices to help you establish your business, but it comes at a cost – sometimes a very steep cost. Purchasing one can be a massive financial commitment, with some franchises requiring capital in excess of $1 million - and this is for an initial investment. It may not include ongoing royalties, such as contributions to national and local advertising campaigns. Still, depending on the name recognition, systemic assistance and other benefits offered by the franchisor, the price can actually be a bargain.
Starting a business is a serious undertaking. The choice of whether to buy an existing business or start a new one is critical to your success. If you don’t have a competent business advisor, give us a call. We will be glad to help you formulate your strategy.
Have a happy and prosperous 2009.