Should you go for a start-up or an existing business?

How to buy a business

For many entrepreneurs, the abiding dream is to start a business from scratch and turn it into a thriving enterprise. It’s often the first choice for those looking to turn a passion into a profession, especially if start-up costs can be kept manageable.

But while bootstrapping your own business may feel like the purest option, it’s also a path that’s bristling with challenges to wrong-foot the unwary, and the longed-for financial rewards can seem distant at times.

Another – admittedly less romantic – notion is to seek out an established business that resonates with your requirements. There’s plenty of choice, whether you’re in the market for an urban bridal boutique or a rural B&B, and the good news is the spadework’s already been done.

What value goodwill?

Cost is an important factor in any business decision. Buying an established business will often appear to be more costly – especially if you’re buying an element of goodwill along with the fixtures and fittings but it’s the goodwill that’s likely to be generating an income from the get-go – something neither you nor your lenders can rely on with a start-up.

It can be easier to agree funding on an existing business, as long as the figures stack up. Standard calculations can be used to assess value and if the business case is strong, you can feel more confident about the kind of income you can expect to generate based on performance to date

It’s worth remembering, however, that goodwill can evaporate if it’s not nurtured, so you can’t afford to let your newly acquired business coast. You should also deliberate long and hard not only over your prospective business’s financial history but over its order pipeline – after all, it’s future performance that will impact your bottom line, not the past.

And if you’re not an expert?

Buying an established business has the edge if you’re planning a venture in which you have limited experience and want to hit the ground running.

If you can acquire a company with knowledgeable staff, a steady turnover and established supply chain, you can afford to stray outside your professional comfort zone to some extent. Managing staff who are experiencing change themselves can be challenging but if you handle the transition with honesty and transparency, everyone involved can move forward with a sense of optimism.

What about businesses built on trust?

Some businesses are trickier to acquire than others: where the organisation relies heavily on its existing owner-manager for its day-to-day running or where repeat business is built on trust, for instance. Hair and beauty salons, therapists and clinicians all fall into this category and there’s a much greater risk of a fall-off in business following an acquisition.

The key here is to reassure existing customers of continuing high standards of service and to introduce changes or improvements gradually to avoid any sudden loss of trade.

The bottom line

You’ll often part with a bigger slice of cash upfront when buying – as opposed to starting up – your own business. The more successful a business is, the more you’ll pay, but if you’re looking for an instant return and a platform that facilitates growth, you’ll be hard pushed to achieve as much in as short a time with a start-up.

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