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Business Tips

Is Buying a Business Safer than Starting a New One?

11/03/2020

It is often said that entrepreneurship is a state of mind, whereas buying an existing business is a good cut-out process.  And therein lies the fundamental difference. Now, figure out by yourself: which is a safer bet? Entering into a state of mind that needs years of commitment, tenacity, and perseverance to build a brand, or entering into an agreement where parties to a common line to achieve an intended objective that of buying a well-established business?  And this may need serious discussion which the blog intends to cover within its scope.

Envisioning a new business

The accepted reality in the startup ecosystem anywhere in the world is that 90% of the startups fail. The failure rate of startups notwithstanding, less than 10% of new businesses make a mark for themselves and turn into established ones, providing they get funded at varying levels for scaling up operations. Furthermore, another 42% of startups fail because they fail to address a pain point. If a new business owner feels he/she is one among the ‘also ran’, it’s time to rethink the business vision and reinvent strategies to prevent failure, and maybe take the exit route.  

To put things in a nutshell, a founder gets an idea, develops what he/she thinks is the ideal solution, tries to sell the idea (gets a few investors on board in the process), before the founder is faced with shortage of funds, and the startup—rather the idea—decays over time. This, in actuality, is the lifecycle of a failed startup.   New businesses more often than not fall into the booby trap of innovation. There are few startup owners that give a ‘more than life’ status to their innovative product or the brand itself, and who are emotionally attached to their companies such that facing failure can be the end of the road for them. It’s more often the terrible case of “let’s do it. Whoa, whoa. Eh, it looks pretty much easy” without even exploring their customers’ wants and needs. As a result, they suppose their customers will tell them everything they want to know about their product or service. Now, we don’t mean in any sense that a startup should leave it here, nor kill it cold-blooded. But coming to terms with reality is as important as the business plan itself—the sooner the better.  For instance, if your business has been built upon some nice-to-have-features, how did it go with your targeted audience?  The answer to many such questions may blow up the bubble you are living in. Failing to show proof of revenue can kill any business, and that’s all about it.  Long story short, if you want to build a business from scratch, and scale it up to the next level, focus on the product and users, and, more importantly, cut the other crap.

Buying an existing business

Buying an existing business presents its own bit of challenges. Never the safe way out as it involves many factors before deciding on buying a business. The biggest advantage is that you need not have to go through the motions that a startup owner would ideally undergo in phases.  No paint points and those steep learning curves which put you to test otherwise. With a mature customer base, successful operation process, trained workforce, and excellent vendor relationship, an existing business offers early advantages to buyers. The availability of a proven business model for guaranteed growth and long-term sustainability adds to the excitement.  Generally speaking, pre-existing businesses have an excellent track record. It is generally the reputation that an established business enjoys in the marketplace that speaks for itself, which takes us to the point that acquiring customers is a painfully grinding process than retaining the existing customer base.   

Add to that the brand identity an established business enjoys offline and on social media and other marketing channels making a ready-to-sale business an attractive proposition.  The prospect of buying franchises of established brands is fast gaining popularity with those willing to invest in readymade, profitable businesses.  

Talking about the challenges, buying an existing business may require handling accounting, legacy systems, personnel, and methods that are no different from that of starting a new business.       How seamless is going to be a business transfer? What is the maximum and minimum period of transfer? Is the ownership transfer communicated to the stakeholders, external and internal customers?  Does the new owner have a substantial amount of capital to invest and scale up operations? What are the plans ahead for accelerating business growth? What are the changes in the organizational structure required post-transfer? What are the financial options available in the buying process? Is net positive cash flow estimated for the first five years post-purchase in line with the market value? Who are the primary competitors, both offline and online? Who are the new entrants into the market? Are financials and records readily accessible to the buyer? How good is the market and location for the type of business? Are the financial statements of the prospective business for sale available in the public domain? Is the buyer open to the company policies, corporate culture, and procedures already in place?  If a buyer is mentally prepared to answer the aforementioned questions, and take a few risks along with his/her stride, there is every reason for the business traded to be a successful one.

Author Bio

Shameer.S is a storyteller, seasoned content writer in the area of startup and SME business management, and a vivacious vocalist and voracious reader when he is in his elements.

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