When it comes to owning a business, there are two choices. You can start your own business from scratch, or you can buy an existing business. While both have pros and cons, sometimes buying an existing company is a better option.
The Perks of Buying a Business
Most businesses fail. You might not want to hear that, but it’s true. It doesn’t matter if you’re launching a new business in a proven market or a disruptive startup in a newer category – the odds are squarely against you.
For new businesses – meaning barbershops, florists, coffee shops, and car lots – the failure rate is around 70 percent. Roughly 20 percent of businesses flop within the first 12 months, while 50 percent are out of business by the end of year five. By year ten, just 30 percent of new businesses remain solvent.
The numbers are even worse for startups trying to disrupt the marketplace. Just 10 percent of these business ventures still have their doors open after 10 years. The other 90 percent fail as a result of poor market fit, lack of cash flow, marketing problems, legal issues, etc.
Even venture capital funded businesses – which have the support of experienced and skilled industry veterans with deep pockets – fail at a rate of 75 percent. Yes, you read that right; three out of four VC-backed businesses fail.
In other words, starting a business is tough. It doesn’t matter if you launch a conservative business selling coffee and biscuits on a busy downtown street or a category-shattering software that promises to revolutionize an entire industry, succeeding for five, 10, or 15-plus years is unlikely.
So when it comes to owning a business, it’s almost always a better idea to buy than to build. If you can buy an existing business that’s already made it 12 months, one year, five years, or even 10 years or more, you’re able to eliminate a lot of the risk. This doesn’t guarantee success, but it does give you an advantage.
Here are several reasons why it often makes more sense to buy an existing business rather than start your own from scratch:
1. Immediate Cash Flow
With a brand new startup, it can take six months to a year (or even longer) to generate revenue. It can take even longer to become cash flow positive. In other words, it’s probably going to be a while before you see any money in your pocket.
With an existing business, there’s existing cash flow. It might not be the kind of cash flow you want, but there’s something to work with. You can at least count on being cash flow positive right from the start.
2. Existing Customer Base
Existing businesses have existing customers. This gives you an immediate advantage over startups that are just now cutting the red ribbon and opening their doors for the first time.
Research shows that it costs approximately five times more to acquire a new customer than to retain an existing customer. The success rate of selling another product or service to an existing customer is in the 60 to 70 percent range, while the success rate of selling to a brand new customer is only 5 to 20 percent. Existing customers are five-times as likely to repurchase, five-times as likely to forgive, and four-times as likely to refer.
There are no guarantees that you’ll be able to retain 100 percent of a company’s customers after buying the business, but you should be able to retain a large percentage. This gives you a major advantage.
3. Established Processes
Existing businesses have existing processes. There are certain rules, steps, and standard operating procedures in place that allow you to step in and run “the show” from day one. It won’t always be smooth sailing – and there will be a big learning curve in many instances – but there’s something nice about being able to take something that’s already functioning and focus on tweaking small elements (rather than feeling like you have to create a whole new system overnight).
4. Existing Licenses and Permits
New businesses have to apply for licenses, permits, and other credentials in order to legally operate in a particular industry or jurisdiction. If you’re starting your own company, plan to get all of this documentation on your own. If you buy an existing business, it’ll come with everything you need. (Though you may need to renew these licenses and permits as part of the transaction.)
Making the Right Decision
Being a business owner is difficult, challenging, and trying. It doesn’t matter which way you slice it. Having said that, you may be able to take a shortcut to success by purchasing a business that already exists and has proven that it can survive the first several years of operation (which are statistically the most difficult). You still have to do your due diligence, but the odds are much more in your favor.