Thursday, January 13, 2011

Buy vs. Start a Business: Advantages and Disadvantages

Someone recently asked me to provide them with a list of the advantages and disadvantages of buying a business vs. starting a business. There are inherent risks in both business acquisitions and business start-ups. Some people have a profile better suited for one over the other. Here is the list I provided the individual.

Advantages of buying a business:
1) Assuming the business is profitable and has been for at least two years, you gain easier access to bank financing and other financing entities because the business has a verifiable track record.
2) You already have customers and potential customers.
3) You have an operational infrastructure - personnel, IT, processes, etc.
4) You have a proven product or service.
5) You have operational cash flow (again, assumes you purchase a profitable enterprise).
6) You can leverage the existing customer base or product to sell your new product or add-on service offering.
7) Business may already have a D&B profile and established business credit.
8) You have employees and management who can help you better understand the business and its operating environment.

Advantages of starting a business:
1) You can operate virtually and start on a shoestring budget.
2) You can establish and mold the company culture as you wish.
3) You can move as quickly or as slowly as your lifestyle and desires dictate.
4) Essentially, you (or you and your fellow founders/investors) have complete freedom to do what you want, within legal and financial limits, until your company reaches a certain point.

Disadvantages of buying a business:
1) You may not do sufficient due diligence and end up with serious problems you didn't foresee.
2) The company may have unknown legal or environmental issues that could crop up 1-3 years later.
3) You could lose a major customer soon after purchasing the business. (Then you'd have a business which isn't worth nearly what you paid and/or on which you can't make the payments.)
4) You may not like the employees and/or management.
5) You may have customer service or employee morale issues, or both.

Disadvantages of starting a business:
1) Difficulty obtaining sufficient start-up capital.
2) Until you have the funds to hire others, you must handle most of the functions yourself.
3) If you do not have an advisory board, you have to consider all decisions - strategic, operational, financial, etc. - on your own, until you can hire management.
4) You have to develop a product or service and find customers for that product/service from scratch.

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