Individuals looking to start a business often wonder if it would be better to start a new business from scratch or purchase an ongoing business that has demonstrated results. While each person’s own situation and preference is different, buying an already existing business (including a franchise) has a few advantages:
- Established goodwill and brand recognition:
When you are starting a new business from scratch, you must develop your new concept’s brand to create brand recognition, which often means spending significant time and resources in marketing campaigns. But when you are buying a business, which has been operating for a few years, that business may already have an existing clientele and may be a well-known brand in the local market, so you’ll have less marketing expenses at the beginning.
- Proven processes, methods, and policies:
The business you are buying will probably have set processes and methods of operation, as well as company policies which may have been successful for the previous business owner. If that is the case, you don’t need to reinvent the wheel. Also, the business attorney drafting the purchase agreement should draft a clause in the contract providing for the previous business owner to train you in all their operations methods and company policies, so that you are able to learn what has worked for the previous owner in the past.
- A pre-existing network of contacts, vendors, and distribution channels:
When you are buying a business that has been in operation for a while, it is likely that the business already has a pre-existing network of contacts, vendors and even established distribution channels for the business’ products. These could be very valuable assets for you as the new business owner.
- Savings in time and resources to set up the business location:
If you are buying an ongoing business which has a physical location, you’ll be saving a lot of time and resources while not having to select a location, negotiate a new lease agreement, prepare the build-out, and proceed with the construction of your business’ location.
- Accounting history:
If a business has been running for a few years, it’ll probably have an accounting history which your CPA will need to study during the due diligence period. This accounting history will give you a good insight into the business cycles so that you can identify high and low seasons for the business and get a better understanding of the business’ fixed costs and profits.
- Market and competition research history:
Lastly, if a business has been around for a few years, it’s likely that the previous owner may have done a market and competition study during his or her ownership of the business. You can benefit from having such research as you can start directing your efforts to the right audience, while also understanding better your competition.
In conclusion, deciding whether to buy an ongoing business or start a new concept, it’s a personal decision, in which many factors (including the ones listed here) need to be considered. But if you decide to buy an existing business, doing a complete due diligence into the business activities and financial will be a critical part of the purchase process.