Buying a Business vs Starting New: Which Is Smarter?

Should you buy an existing business or start one from scratch? Both options have very different benefits, risks, timelines, and financial commitments. In this brief guide, we’ll go over the pros and cons of each option and how to determine which is the smarter move for your situation.

Starting a Business From Scratch: Pros and Cons

Starting a company from the ground up gives you full control over every aspect of the business, from its brand reputation to its operations. However, it carries significant risks in the early stages.

Pros of Starting a Business From Scratch

• Total creative freedom. There are no pre-existing systems or contracts to navigate that could hinder your vision for the business.
• Control over the up-front costs. You can start small to reduce financial risks and scale up once you start generating revenue.
• Starting with a clean slate. Starting from scratch means you do not inherit problems like hidden debts, pending legal issues, or a poor brand reputation.

Cons of Starting a Business From Scratch

• High chance of failure. According to the US Bureau of Labor Statistics, only 35% of businesses survive their first ten years. Over half fail within the first five years of operation.
• No existing revenue stream. Owners must build brand awareness, attract customers, and establish cash flow. This can take months or years, depending on factors like the economy, market demand, and marketing strategies.
• Less access to financing. Lenders and investors often prefer businesses with a proven track record. You may find it difficult to secure investments while your business is establishing itself.
• Time and work-intensive. When you build a business from scratch, you have to put time into every aspect of it, including appointments with legal experts, paperwork, building operational systems, and hiring. Even automating and outsourcing business processes will take time and funding to complete.

Starting from scratch can be rewarding to many, but this path requires resilience and a willingness to handle uncertainty.

Buying a Business: Pros and Cons

Buying a business takes many forms, such as acquiring an existing company, buying into a franchise, or acquiring an ownership stake. This option allows new owners to start profiting right away with established systems and customers.

Pros of Buying a Business

• Operational processes already exist. Employees, management systems, technology platforms, and vendor relationships are already established. This means less time and money spent on setting up the necessary parts of the business before you can open.
• Immediate revenue and cash flow. An established business already has customers, suppliers, and operating systems in place. In some cases, the business even remains fully operational during the transfer of ownership.
• Established brand and market presence. If the business is well-marketed, it already has a reputation and credibility in the target market. This means fewer marketing dollars need to be spent on brand awareness.
• More predictable financial performance. Historical financial statements allow you to evaluate revenue trends, expenses, and profitability before purchasing the business. This history also makes it easier to find lenders and investors.
• In many cases, you inherit trained staff that understands the business and its customers. They help keep the business running smoothly and can lend unique insights into customer insights, including what changes loyal customers wish to see.

Cons of Buying a Business

• Higher upfront cost. Purchasing a business usually requires a significant initial investment to acquire the inventory, systems, equipment, customer lists, and other valuable assets.
• Potential hidden problems. Issues like operational inefficiencies, a key supplier closing down, or problem employees may not be immediately obvious until after you purchase the business.
• Resistance to change. Customers or employees may resist changes to the status quo or leave after a change in ownership. This can limit how far you can change the business to fit your vision for it.

Buying a business can be a faster and more predictable route to success, but it is less flexible than building a business from scratch.

Key Factors to Consider Before Deciding

Choosing between buying a business and starting one from scratch requires an honest evaluation of your goals and comfort zones. A few key factors include:

• What is your risk tolerance? Do you get a thrill from sudden curveballs and challenges? Or do you prefer to know what you are getting into?
• How long are you willing to wait for positive results?
• What is your budget, and how do you plan to finance the business?
• Do you want to put in long hours to research and build every aspect of a business?

If you enjoy high stakes and the satisfaction of turning an idea into a reality, you may find starting a business from scratch a better fit for you. If you prefer to step into a stable, established system and fine-tune it to your vision, buying a business may be the smarter move for you.

Questions to Ask When Buying into a Business

When you are evaluating an existing company, asking the right questions helps uncover potential risks and opportunities. Here is a list of questions to help you spot red flags or get a better sense of what it would be like to own and operate the business.

• Why is the business for sale?
• What is included in the sale?
• What kind of training and transition period is included?
• Can I see the documents for the past three years of revenue and cash flow?
• What are the main expenses? Are there any upcoming increases in these expenses?
• Are all licenses, permits, tax commitments, and contracts current?
• Are there any pending lawsuits or potential legal issues?
• Are there any outstanding debts and liabilities I will need to handle?
• Are there any key customer or vendor dependencies? (For example, a vendor that provides all the key components to a signature product or a customer that makes up 15% of all sales)
• Are supplier contracts and agreements transferable?
• Is the sales strategy reliant on customer loyalty or one-off sales?
• Is the market seasonal, or do sales remain steady year-round?
• Terms of key employee contracts, any tenures, pension plans, current benefits, and other employee-related costs.

These questions will help you get a feel for the risks, challenges, and opportunities the business offers.

Which is Smarter?

The best choice depends on your goals, resources, and risk tolerance.

Starting from scratch offers you creative freedom and the opportunity to build a unique brand. Buying a business provides immediate operations, established customers, and potentially faster revenue. Generally, our experts advise buying a business because it offers lower risk and faster returns on your investment.

Sunbelt Business Advisors Can Help You Buy the Right Business to Meet Your Goals

Our goal is to help you succeed in your business venture, so we dive deep into everything from your budget to calculating each potential business’s earning power. We have thousands of listings ranging from small businesses to those with over $150,000,000 in revenue across multiple industries, so we are confident we can find the right fit for your journey. Contact us today to get started.