In the current economy, the business-minded are considering many options. They can start by establishing their own companies or buying existing ones. Although starting a new business is less expensive than buying an existing one, the advantages of buying a well-established business are considerable. In this post, I'll highlight some pros and cons of buying an existing business.
1) Despite the fact that founders are more likely to sell their existing business at a price lower than its real market value, starting a new business is less expensive than buying an existing one. However, having a monthly cash flow helps to offset the higher cost of an existing business vs. starting one up.
2) A well-established business helps the buyer to focus on running, improving, and building the business as the seller has already taken care of the heavy lifting associated with starting the business. This would vastly help the buyer to reduce the cost and increase the profit.
3) A startup business will cost more in advertising. In order to attract customers to the business, the founder will need to spend a great deal on advertising.
4) Hiring employees who know their jobs can vastly increase the profit of a company. That being said, new businesses encounter problems since new employees are not familiar enough with their duties. This may cause cost and decrease the profit. However, according to Acquireo, an existing business has well-established staff members who know their jobs and are very likely to lead the business on the success track.
5) Despite the fact that starting a new business gives the company founders a huge opportunity to build the reputation of their own business from scratch, this may take a long time and incur extra cost which ultimately decreases cash flow and profit. On the other hand, a well-established business may already have its own costumers and a good reputation within the industry. That being said, some existing businesses are not known by their customers and within the industry, or may be known due to either low quality products or bad customer service. In this case, spending time and money will be required to let the public know the company is under new management and ensure them that the quality and the customer service will increase in the near future.
In my weighing of the pros and cons, purchasing an existing business seems far more likely to be a better investment than starting a new one.
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Of further interest may be Peter's Siegel's Buying a Small Business – Facts All Potential Business Buyers Need To Know which highlights essential factors to consider before buying an existing business.
Photo: Fatemeh Bahmani
Elmira Hamidi is a graduate student in the Virginia Tech Department of Communication, and a marketing assistant at the Virginia Tech Business Services Office.