By Scott Bushkie, President Cornerstone Business Services Inc.
Over 17 years of selling businesses, I’ve talked with many individuals who dream of being their own boss. Some of them have fuzzy plans and little initiative, but with others you can tell it’s only a matter of “when” not “if.”
But even many committed future business owners are still not sure if buying makes the most sense rather than starting a business on their own. Of course, I’m biased and I think they should buy. But there are times when a startup is the better choice. Here are some pros and cons of both:
Startup Pros: If you’re a dreamer, you can create your business exactly the way you want from scratch. You set the culture. You handpick the employees and train them the way you want. And you don’t have the debt load of buying a business, so you don’t have a large payment to make right away your first month in business. You can start as big or as small as you like.
Startup Cons: The downside is that there’s no proof the business will work. You have no customers, no processes and no experienced staff in place. And you have a lot of non-revenue generating responsibilities to take care of, like setting up insurance, computer networks, employee handbooks, and accounting systems. And even though you don’t have debt payments right away, it could be years before your business makes a profit—or even enough to pay a decent salary.
Buying Pros: Many of the benefits of buying a business correlate with the weaknesses of starting one. When you buy a business, you get a proven concept. You know it works and you have a track record of revenue to prove it. You’re getting a recognizable brand with a build-in base of customers, who hopefully keep coming back.
What’s more, you don’t have to build the business infrastructure like procedural manuals, safety programs, or a website. The tedious work is already done, and you can focus on bigger picture leadership.
Buying Cons: The most obvious downside of buying a business is the debt. More than likely you won’t get a loan unless the lender feels confident the business can cover your debt service, plus a salary, but every acquisition comes with risks. Perhaps the prior owner was the rainmaker and all the customer relationships went with him/her when they left. Or you could lose a substantial customer and quickly find yourself in financial trouble.
Personally, I think buying a business is the safer choice—you’re getting a concept you know works, a trained pool of talent, an established brand, and an existing cash flow. To be honest, though, this advice is coming from someone who started his own company. Sometimes the concept you want to pursue doesn’t exist yet or isn’t available on the market, and out of necessity you have to start from the ground up.
At the end of the day, there’s risk in whatever you do. Groups like SCORE can help you minimize those risks by providing leadership and outside perspective. If you’re considering business ownership, talk to an advisor about your ideas, goals, and financial situation, investigate the current business market and then follow the path that’s right for you.
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