Your new business: to start or to buy?

This time it’s serious! You have been dreaming of owning a business for the longest time and you are finally going to do it. Now that the considerations are getting serious, you will have to decide whether to start or buy a business. Juggling these two options can be tricky, with a lot at stake.

There are advantages and disadvantages for each, so it is important to make an objective assessment of of your goals, your situation and resources before taking the plunge. The key difference between buying and starting is that the established business has (in theory) established branding, infrastructure, client base, systems, procedures, marketing and cash flow. This has implications - negative and positive - on your decision to buy or start a business.

Here are some considerations to get you started:

Price. Buying an established business generally costs more, as you are paying for the hard work of someone else to set everything up and grow the business. The higher purchase price will also mean that some of the additional expenses that are usually incurred from ‘trial and error’ when starting our own business are reduced.

Cash flow. Operating businesses have established cash flow that you will have access to once you take over. Start-ups take more time to get started (usually more than expected) and there can be a squeeze on capital and cash flow during the early stages.

Capital gain. When paying market price for a business, the previous owner has often made a capital gain that you are paying. You can make further gains if they business goes well, but the gain from zero only goes to the first owner.

Your idea. If you have an idea for a business that doesn’t currently exist, then your choice is made for you. Shaping your business in exactly your own vision is important for many people, which means starting yourself or changing an operating business.

People factors. These can play a big factor on the success of any business and present a risk when purchasing. Sometimes established businesses rely heavily on the skills, experience or (even worse) the personality of the current owners. Established relationships between owners, staff members and clients can be threatened by a new owner, with negative consequences on the health of the business.

Likelihood of success. For businesses that are starting off there can often be little indication of whether the business will succeed with the exact mix of parameters for the proposed business, such as location, demographics and product/service offering. This is measurable for established businesses, so the risk factor is reduced. There is a risk in start-up businesses that you will spend time and money setting up systems and infrastructure only to require change or upgrade because these were not tested beforehand.

Clean slate. Start-up businesses can be created in your exact vision, including everything from logos, names, infrastructure, systems, fit out, location and staff. When buying a business, many of these cannot be changed and the business is largely the vision of someone else.

Regardless of which pathway you decide to follow, it is equally important to take the time to conduct due diligence. Starting or buying a business is an important decision that requires thorough analysis and careful planning. If you do decide to buy a business, look beyond the financials and make sure that all of the systems, procedures, plans and infrastructure are as established as they need to be. Make sure you are actually getting what you pay for.

Dr. Warren Harmer

Business planner and small business consultant

I am a cultivator of great small businesses. I have a Ph.D in science but fell into the world of small business by accident and discovered my passion. My experience owning and consulting to small businesses now spans over 17 years. I like to solve problems using a scientific approach; looking objectively at businesses to see what is happening and applying first principles. In small business, outcomes reign over theory.

Practical, hands-on advice for small business owners is sorely lacking, since most ‘experts’ have never owned one. Most business information is targeted to big business and their employees.

My objective is to offer instructive, ‘how to’ information to make business ownership easier, less stressful and more enjoyable.

Warren Harmer
Chief Business Planner
0414 609 719