26 May Buying a Business Buying an Existing Business Versus Starting a Business
Making the decision to start a business or to buy an existing business is quite difficult as it hinges on personal and financial issues. Start-ups typically encounter stumbling blocks that slow down the company progress and even it in future jeopardy, creating stress for the management team. Starting a company also is incredibly exciting when you start to see it grow. Obtaining financing to purchase an existing business that has assets and cash flow is easier then securing capital for a start-up venture.
Either business model is risky but many start-ups have an increased potential to fail. Venture capital firms, highly skilled in selecting investments and building companies, expect that out of ten companies which they invest, at least two will fail and several will have a ‘mediocre’ financial health. Start-up entrepreneurs deal with plenty of unknown factors, such as whether customers will be interested enough to buy the company products and services and whether the company can operate efficiently enough to gain profit. Existing businesses already have customers and a reputation in the marketplace, the challenge is in building on top of what has already been accomplished.
When you have a start up concept, you create value in the business with every great decision you make. When you purchase a business, you are paying for values that have already been established. How much are you willing to pay will depend on your evaluation of a company’s potential for the future, as well as what it has earned in the past. It is common for the buyer to pay the seller over a period time. If you significantly overpay for the business, it can mean you will not have the cash available to make investments that you have planned or for building and improving the company or to pay yourself the compensation you envisioned.
When you buy a business, during the due diligence phase the buyer and his legal representatives review the financial statements of the business and establish a value. Financial statements do not give the full picture. The company might show significant receivables on the balance sheet but the question is whether these can actually be collected and turned into cash. There might be difficulties that will come up such as new competitors on the verge of entering the market.
Starting company allows you to assemble your own management team and selecting the best people you can find and those that can work well with you and as a team. When you buy a business, you inherit the people already there. It takes time to weed out poor performers; long time employees might resent the new owner because he thought it would be him as the CEO someday. In an existing company; policies and procedures are already in place. The new owner might encounter resistance to change.
When you purchase a business, the financial rewards begin right after the transaction closes because the company already generates cash flow and is hopefully profitable. Start up companies go through a painful period where they lose money. The entrepreneur must have patience and not expect financial rewards too soon. The satisfaction that comes from starting your own company and making it a success is huge and allows you realize your full potential in creating something on your own and defying all odds.