Advantages of Buying a Business Versus Starting a New Business

Starting fresh or buying established? Discover the pros and cons of each option to find the best path for your business ownership goals.

Anyone who wants to own a business has a tough decision to make. Should they start their own business, or buy an existing company? There are many advantages and disadvantages to either decision, and there are plenty of things to consider.

Even if someone has a great idea for a product or service, and they want to launch their own company to make it happen, many startups struggle when their revenue doesn’t grow as fast as expected and they run out of money before the business turns profitable.

Buying an already existing business has a different set of issues, starting with how to finance such a major purchase. It’s important to consider the pros and cons of either option.

The Success Rates for New Ventures and Existing Businesses

 
According to the most recent data from the U.S. Bureau of Labor Statistics, 20.4% of new businesses fail within their first year, 49.4% fail within five years, and 65.3% fail within 10 years.

Statistics on business acquisitions are harder to come by, especially for small business owners. This is partly because corporations will often buy a company to acquire its products and brand. Venture capital firms will often buy a company, load it with debt and siphon off its revenues.

Someone who buys an existing company with the intention of keeping it running has at least a 70% chance of still being in business for more than five years. Some estimates put this figure at more than 90%.

By any measurement, someone buying a business has a better chance of success than someone who starts a business on their own.

Even so, many people choose to start their own business because it gives them the flexibility and freedom to structure their operations in a way that reflects their own goals and vision for success.

Others prefer to buy an already existing business because it offers more predictability and has an already existing revenue stream.

The Pros and Cons of Buying a Business

 
There are many things to consider when choosing whether to buy a business or start your own. It’s important to consider what each option has to offer before making such a decision.

Cash Flow and Financing

An established business already has income. As long as the business is financially stable and profitable, you wouldn’t have to worry about funding your business operations.

If you have to finance the purchase, you can use the existing business’ cash flow and its physical infrastructure (buildings, equipment, inventories, etc.) as collateral in securing a business loan. In some cases, existing owners have been willing to finance the sale of their own business.

You would also have access to the historical data about the business such as sales, expenses, and profits, which can help you make decisions and how to run and grow the business.

When starting a business, the initial investment cost of a startup would likely be much less than the cost of buying an existing business. Even if you use the existing business as collateral, you’ll still have to consider the cost of loan payments and how that will affect your profitability.

Financing a new business can be difficult. You’d have to dig into your own pockets, find investors willing to bankroll your idea, and apply for small business loans. You may have to put up your own private assets as collateral to secure a loan, which could put your own finances at risk.

The Customer Base and Market Access

With an existing business, you can count on it already having an established customer base and a marketplace for its products or services.

When starting your own business, it can be difficult and take time to acquire customers and grow your revenue stream. It can take a significant amount of time and money before a new business turns a profit, so you could be burning through funds and deplete your bank account until you get enough revenue coming in.

Even if you launch a new business in a field where you have plenty of experience, and you have a well-drafted business plan, you may have to go through several trial-and-error cycles before you figure out what works and what doesn’t.

Whichever option you choose, successful networking will be crucial, both within your industry and your region.

Brand Recognition and Track Record

Even if an idea for a new business sounds great on paper, there’s no guarantee of success. It takes time and money to establish a brand and a reputation.

An existing business, on the other hand, already has a brand established with a customer base for its products or services. This can make it much easier to grow the business and increase revenues.

You can also measure the profitability of an existing business before taking ownership. You can examine its financial statements and sales data to get an idea of how financially secure the business is. You can also analyze how well the business is doing compared to its competitors.

With a startup, you’d likely have to burn through a great deal of capital trying to establish a brand identity and it can be much harder to measure your success if you’re the new kid on the block.

Infrastructure and Processes

If you launch your own business, even if you start out in your garage or living room, you’re still going to need people, processes, and equipment. It’ll take time and resources to get those established.

It could take a while for you to find the right employees, and some people could be reluctant to take a job with a new business that may have limited resources and an unproven track record.

The upside is you’d be able to hire people with the exact skills that you’re looking for, who could be willing to follow whatever vision you have for your company.

Buying an existing business means it already has the people and infrastructure that it needs to operate. Whatever buildings, vehicles, equipment, or people you need to run the business are already there in place.
Even if the current or previous owner was underinvesting in the business, you still wouldn’t be starting from scratch the way you would if you started your own business.

Of course, buying a business also means finding the right fit between yourself and the employees. There could be a clash of cultures if you try to change the way they do things faster than the existing employees are ready to accept.

New businesses are often more flexible and adaptable when it comes to embracing new business methods, developing new products or services, or keeping up with changes in technology and societal trends.

Building your own business would give you full control over the type of employees you want to hire and the business culture that you create.

Acquiring Vendors and Suppliers

A new business will have to establish relationships with suppliers and vendors, just as it does with customers. This could be difficult if there is a high demand for whatever goods or services you need to run your business. An existing business would already have a list of vendors that it can rely on.

Expect the Unexpected

Launching a new business can result in all kinds of unforeseen circumstances as you establish your brand and acquire vendors and customers. Many entrepreneurs thrive in this kind of environment, though it’s not for everyone.

An existing business could have unforeseen liabilities that were not evident during the acquisition process. Some of the equipment could be old and outdated. A former customer, employee, or vendor could be planning to file a lawsuit against the company right as you’re taking ownership.

You're Going to Need Financing

Whether you decide to buy an existing business or start your own, it’s going to take passion and resiliency to succeed—as well as the right business financing and banking partner.

We can help you with all your needs no matter which types of business bank accounts and services you need, such as:
• A business savings account.
• Cash management services.
• Business loans, for buying commercial real estate, equipment loans, construction loans, and working capital loans (also known as a business line of credit).

Our business finance calculators can help you analyze many financial decisions such as consolidating your business debt, calculating loan payments, and projecting cash flow.

We’re Always Here to Help You

At First National Bank and Trust Company, we’re focused on family businesses because we are one. If you have any questions about business financing or applying for a business loan, please contact us to meet with one of our commercial bankers or stop by one of our convenient locations in southern Wisconsin and northern Illinois.