What are the advantages and disadvantages of buying a business rather than starting your own from scratch?

When dreaming of running a small business, many entrepreneurs automatically think about starting their own endeavour.

There is a second option though: purchasing an existing small business.

But what are the advantages and disadvantages of purchasing an existing small business in Vancouver? Let us walk you through them.

The advantages of purchasing an existing small business

1. Everything is already set up

There are a lot of decisions to make and legwork to be done when starting a business. When purchasing an existing business, on the other hand, much of the work is done, allowing you to step into an already functioning establishment. This can be especially helpful for first-time entrepreneurs.

2. Profits from day one

It often takes years for a new business to turn a profit. In that time, owners may have to live off savings or hold down other jobs. If you purchase a healthy business, however, you can have a profit from day one.

3. Less risk

With a new business, you do not know if anyone will be interested in the product or service you are providing, especially if you are targeting a new niche in the market. That translates to a higher level of financial risk. By purchasing an established business in Vancouver, you eliminate the risk that there could be no interest in your business.

4. An established customer base

You also do not have to worry about developing a core customer base. While continued customer acquisition is important, that will be the case with any business. The most difficult part of customer acquisition, however, is building the initial base – and that has already been done with an established business.

The disadvantages of purchasing an existing small business

1. More expensive

When purchasing an existing small business, you are paying for the fact that the company is already established. Of course, this comes at a higher cost than starting your own business from the ground up.   

2. Systems are already in place

This was also listed as an advantage – if the systems are strong and correct. If there are any issues or bad practices, however, they can be difficult to fix. Similarly, if there is staff in place already, that can be an advantage or a disadvantage, depending on their work and professional practices, such as employee contracts and unionization.

3. Potential pushback about a new owner

Employees and customers may not like the idea of the business switching hands. If not, there can be pushback against new ownership. The change can be especially challenging if you are making alterations to business practices or staff.

There are many advantages to purchasing an existing small business, but it is important to know how to navigate or avoid the disadvantages. Given this, if you are looking at purchasing an existing small business, always make sure to consult with a small business lawyer.

At Benchmark Law, we will always perform due diligence on the business an entrepreneur is looking to purchase to make sure there are no legal implications. The last thing you want to do is buy a business only to find yourself in legal trouble!

There are many ways a small business lawyer can assist your business – no matter what stage you are at. If you are purchasing an existing small business, starting your own business, or running everyday operation, get in touch with us to discuss how a small business lawyer can help.

3 minutes read

When is it a good idea to buy a business? Would it be a better idea to expand your existing company or launch a start-up?

Given the stakes, it’s important to thoroughly weigh your business goals, risk tolerance and market opportunities before making an acquisition. Here are pros and cons of buying a business.

1. Track record—Buying a business gives you an established customer base, team, business plan and operation. No need to start from scratch.

2. Income—The best acquisition targets are likely to already have solid sales and profits. A new venture, on the other hand, can take a long time to build revenue and become profitable, and the risk of failure is significant. Only about half of Canadian start-ups are still operating after five years, according to Innovation, Science and Economic Development Canada.

3. Financing—The assets of the company you are buying can be used to help secure financing needed for the purchase. Lenders are less likely to take a chance on a start-up.

4. Vendor assistance—Existing owners often help finance the purchase of their business by providing vendor financing. Besides being a good source of patient capital, the vendor’s investment provides motivation to the former owner to help make a smooth transition.

5. Market knowledge—Acquisition may be a good strategy if you want to expand into a new industry or geographic location where you lack contacts and knowledge.

1. Poor fit—It can be difficult to find the right company to acquire—one that is a good fit with your existing business culture and strategic goals. A poor choice can cause the acquisition to become a sinkhole for your time, money and other resources.

2. Integration challenges—Integrating a new company into your existing operations can be harder and more time consuming than entrepreneurs realize. Expected payoffs often don’t materialize as quickly as planned.

3. Vision conflict—It may be harder to impose your vision on a company that already has its own culture and history than if you were to expand a business you already own. Some entrepreneurs like the challenge and excitement of starting an entirely new company or embarking on an expansion where they can put their stamp on from the beginning.

4. Dependence on the old guard—A rocky ownership change can prompt key staff to leave and imperil customer relationships. That can be especially problematic in a business that is highly dependent on the involvement of the owner or certain employees.

The decision may rest on market and growth opportunities. Acquisition may be a good strategy if prospective companies are undervalued because of market conditions. Conversely, if valuations are high, you may need to obtain more financing, potentially reducing the long-term returns from the acquisition.

A good exercise is to compare the cost of acquiring an existing business versus starting a similar one from scratch. This comparison should include not only the financial expense and projected returns, but also the cost in terms of time and attention for you and your team and disruption to your other projects.

Whatever your decision, the buying will have a greater chance of succeeding if you have a clear, detailed understanding of why you are proceeding and how the venture will meet your business goals.

In their book, Start Your Own Business, the staff of Entrepreneur Media, Inc. guides you through the critical steps to starting a business, then supports you in surviving the first three years as a business owner. In this edited excerpt, the authors discuss the process you should go through when purchasing an existing business.

When most people think of starting a business, they think of beginning from scratch—developing your own idea and building the company from the ground up. But starting from scratch presents some distinct disadvantages, including the difficulty of building a customer base, marketing the new business, hiring employees and establishing cash flow ... all without a track record or reputation to go on.

If you're worried about the difficulties involved in starting a business from the ground up, you might decide that buying an existing business is a better fit for you. When you buy a business, you take over an operation that’s already generating cash flow and profits. You have an established customer base and reputation as well as employees who are familiar with all aspects of the business. And you don't have to reinvent the wheel—setting up new procedures, systems, and policies—since a successful formula for running the business has already been put in place.

On the downside, buying a business is often more costly than starting from scratch. However, it’s often easier to get financing to buy an existing business than to start a new one. Bankers and investors generally feel more comfortable dealing with a business that already has a proven track record. In addition, buying a business may give you valuable legal rights, such as patents or copyrights, which can prove very profitable.

Of course, there’s no such thing as a sure thing—and buying an existing business is no exception. If you’re not careful, you could get stuck with obsolete inventory, uncooperative employees or outdated distribution methods.

Buying the perfect business starts with choosing the right type of business for you. The best place to start is by looking in an industry you're familiar with and understand. Think long and hard about the types of businesses you are interested in and which are the best matches with your skills and experience. Also consider the size of business you're looking for, in terms of employees, number of locations and sales.

Next, pinpoint the geographical area where you want to own a business. Assess the labor pool and costs of doing business in that area, including wages and taxes, to make sure they’re acceptable to you. Once you’ve chosen a region and an industry to focus on, investigate every business in the area that meets your requirements. Start by looking in the local newspaper’s classified ad section under “Business Opportunities” or “Businesses for Sale.”

And just because a business isn’t listed doesn’t mean it isn’t for sale. Talk to business owners in the industry; many of them might not have their businesses up for sale but would consider selling if you made them an offer. Put your networking abilities and business contacts to use, and you’re likely to hear of other businesses that might be good prospects.

When purchasing an existing business, you'll definitely want to put together an “acquisition team”—your banker, accountant and attorney—to help you. These advisors are essential to what is called “due diligence,” which means reviewing and verifying all the relevant information about the business you're considering. When due diligence is done, you'll know just what you're buying and from whom.

The preliminary analysis starts with some basic questions. Why is this business for sale? What's the general perception of the industry and the particular business, and what's the outlook for the future? Does—or can—the business control enough market share to stay profitable? Are the raw materials needed in abundant supply? How have the company’s product or service lines changed over time?

You also need to assess the company’s reputation and the strength of its business relationships. Talk to existing customers, suppliers and vendors about their relationships with the business. Contact the Better Business Bureau, industry associations, and licensing and credit-reporting agencies to make sure there are no complaints against the business.

While you and your accountant review key financial ratios and performance figures, you and your attorney should investigate the business’s legal status. Look for liens against the property, pending lawsuits, guarantees, labor disputes, potential zoning changes, new or proposed industry regulations or restrictions, and new or pending patents; all these factors can seriously affect your business. Be sure to:

• Conduct a uniform commercial code search to uncover any recorded liens (start with city hall and check with the department of public records).
• Ask the business’s attorneys for a legal history of the company, and read all old and new contracts.
• Review related pending state and federal legislation, local zoning regulations and patent histories.

Legal business liabilities take many forms and may be hidden so deeply that even the seller honestly doesn’t know they exist. Be sure to have your lawyer add a “hold harmless and indemnify” clause to the contract. This assures you’re protected from the consequences of the seller’s previous actions as owner.

Also make sure your deal allows you to take over the seller’s existing insurance policies on an interim basis. This gives you time to review your insurance needs at greater leisure while still making sure you have basic coverage from the minute you take over.

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