When someone imagines owning their own business, they tend to see themselves building something on their own from the ground up. Owning your own business is the fastest way to financial independence, but starting something from scratch can be risky and expensive. Buying an existing business can often be the better option - you still get financial independence, plus other advantages that you can’t get from starting a brand-new business.
Proven Business Model
A good business model is vital to a company's success. According to an article by Fundsquire, 17% of new businesses that fail do so because they didn't have a business model. Existing businesses will have a business model already in place that is proven to be effective. There are various processes and systems in place that already benefit the business. This includes things such as accounting systems and customer service processes. You can make changes to these systems, but at the very least, you have a serviceable starting point that saves you time and money.
Another part of the business model is the business's suppliers. If you buy an existing business, you'll have rapport with suppliers already. The seller is able to advise you on which suppliers they preferred and which ones they didn't.
Key employees are another important aspect of the business model. Employees who have worked in the business and the industry provide valuable experience. Not only do these employees save you from having to hire and train new ones, they can also provide you with insight into the business, and ways it could improve.
Established Reputation and Customer Base
A business's reputation can be very significant. This isn't something that can be built overnight though - it takes time and patience. However, buying an existing business that is already established in the market helps with this process. The business typically has advertisements, promotions and an online presence already in place, making the business known and relevant. Customers recognize the name, so they're more likely to shop there. A new business may have trouble getting customers because that name recognition isn't there. The existing customer base also ensures the business continues to make sales and generate earnings, even during the changing of ownership.
Getting financing for a new business can be an extremely challenging. Lenders are much more comfortable financing an established business with a proven track record. You may end up using more of your own money than you were planning. An existing business has organized financial records, a history of profitability, and a good business plan - lenders like to see this. Purchasing a business also gives you the option of getting financing from the seller instead of outside sources.
Training Provided by the Seller
There are a lot of items included in the sale agreement that the buyer and seller need to agree on. At times, a part of this agreement is a transition period. This is where the seller agrees to stay with the business for a pre-determined period of time after the sale. During this time, they teach the buyer about the industry, the business itself, and the various tasks they do. The transition period helps ensure that the buyer is prepared to own and operate the business on their own. This insight into the industry and the business is another added bonus when purchasing an existing business.
While starting a new business sounds like a good idea, it is very risky. According to Fundsquire, 20% of new businesses fail within the first year. By the third year, this number jumps to 60%. When you buy an existing business, you are able to carefully investigate the business and understand exactly how your skills, energy, creativity, passion and ideas can add value to an existing operation. It is a significantly less risky way to gain the financial independence you want.
This article by Deal Studio highlights other benefits to buying a business, and compares them to what you get starting a new business. And this article by Fundsquire mentioned earlier has lots of statistics about new businesses in Canada, updated for 2022.
If you are interested in purchasing a business, contact our brokers for a free, private conversation.