Start New Or Buy Existing?

Once you have made the decision to take the plunge and run your own business, you are faced with a myriad of choices.

One of the first choices you will need to make, is whether you are going to a start a new business up from scratch or whether you will be buying an existing business that is already established.

To help you let’s take a look at the pro’s and con’s.

New Start Up

The main reason behind the new start up is that the new entrepreneur has a unique business concept and an existing business simply does not exist to consider purchasing.

Advantages

The biggest block to buying an existing business outright is the initial purchase cost.

As the business concept, customer base, brands and other fundamental work have already been done, understandably the financial cost of acquiring a going concern is usually greater than starting one from nothing.

So initial start up costs are advantage number one.

Other advantages include avoiding any hidden problems that may comes as a package with an established business.

These could be prior service or product problems, staff related issues that only come to light after take over or stock items that were valued at the time of purchase, but later turn out to be unsellable.

Yes it is possible to reduce these risks by carrying out good research prior to purchasing but the risks still remain.

Starting from scratch does mean that you will have to take care of a bundle of administrative and bureaucratic tasks such as creating your own corporation or business entity to trade with, license registrations where applicable, etc..

Buying An Existing Business

Many find the idea of starting a business appealing, but find their motivation sorely tried after dealing with business plans, investors, and extra legal issues associated with new start ups.

For those disheartened by such risky undertakings, buying an existing business is often a simpler and safer alternative.

Advantages

A Well Established Business

The main reason to buy an existing business is that you are buying an established concern and can know beforehand the current profitability and cash flow situation. This reduces your risk considerably.

In addition, as well as knowing your existing cash flow you will also be taking over an existing business and so that cash flow should continue unabated at hand over, unlike the new start up which has to attract new customers in order to establish itself.

With existing stock, customers, staff, premises and suppliers, your business is already up and running. You just have to improve and tweak it.

Other benefits include pre existing customer goodwill and easier financing opportunities. If the business has a positive track record then you will find it easier to raise finance than for a new unproven start up.

If you decide that buying a known entity in the form of an existing business is the way for you, then even more choices await you.

A third option that is more aligned with the existing business choice, is a franchise opportunity.

Franchise Opportunities

A franchise is a legal and commercial relationship between the owner of a trademark, service mark, trade name, or advertising symbol and an individual or group wishing to use that identification in a business.

Fundamentally that means that the franchiser has an established name and / or business concept that you the franchisee may pay to use.

The franchise governs the method of conducting business between the two parties. Generally, a franchisee sells goods or services supplied by the franchiser or that meet the franchiser’s quality standards.

Franchising is based on mutual trust between the franchiser and franchisee. The franchiser provides the business expertise (marketing plans, management guidance, financing assistance, site location, training, etc.) that otherwise would not be available to the franchisee.

The franchisee brings the entrepreneurial spirit and drive, as well as the actual physical graft, necessary to make the franchise a success.

There are primarily two forms of franchising:

* Product or trade name franchising and

* Business format franchising.

In the simplest form, a franchiser owns the right to the name or trademark and sells that right to a franchisee. This is known as product/trade name franchising.

Think of vending machine operations, you get the name but up to you where you put the vending machines.

The more complex form, business format franchising, involves a broader ongoing relationship between the two parties. Business format franchises often provide a full range of services, including site selection, training, product supply, marketing plans, and even assistance in obtaining financing.

Think of McDonalds or Pizza Hut.

Franchising offers many advantages but comes with the penalty of a higher cost to compensate for all these benefits.

You pays your money and takes your choice!

You will find more information on franchising in other articles on this site.

Remember, knowledge is power and you are accumulating new knowledge at an amazing rate. By reading these articles and carrying out your research you are placing yourself in the top 5% of entrepreneurs.

Feel good about that? You should!

This article was written by Brian K Fitzgibbon CPA.

Brian is an experienced accountant and small business consultant. He runs his own business, lectures extensively on small business topics and has checked out and valued many hundreds of small businesses for buyers.

Brian is also the author of the highly acclaimed and invaluable
"How To Value A Business And Buy It Without Fear"
A do-it-yourself guide for first-time and experienced buyers alike.

To download a FREE Chapter from Brian's book please follow this link: "HowToValueBusiness.com"

January 12th, 2009 | Tags: buy a business, buy existing, buying a business tips, start new | Category: articles | Subscribe to comments | Leave a comment | Trackback URL  |