Is Buying an Existing Business a Viable Entrepreneurial Option - Term Paper Example

Buying an Existing Business- Advantages and Disadvantages. Is this really an entrepreneurial option? [Registration number] 28 February2015 Buying an Existing Business- Advantages and Disadvantages. Is this really an entrepreneurial option? 1.0 Introduction Today, starting a business might be a very tricky path and a daunting task especially considering the available statistics of start-up failures in the UK and the world at large. In a study conducted by Statistic Brain in UK for example revealed that close to 50 percent of all start-up business in the country fail within the first four years. In his book, Gerber (1995) stated that 40 percent of new businesses dissolve within the first year of starting while up to 80 percent fail within their first years. It is in this light that the trend of buying businesses has tremendously grown in popularity in the recent past, with a large section of entrepreneurs opting for this route in place of starting their premises from scratch. However, this process may not be the cheapest in numerous aspects, carrying with its fair share of risks as well. It is only through good planning, and business evaluation coupled with a due diligent research of this option that a bought business is capable of surviving the changes that come with the swapping of the ownership. This paper will evaluate the two advantages of buying an existing business as well provide the demerits that come with this process. By weighing between the two aspects, the paper will determine whether taking this route (instead of starting a business from scratch) is a viable entrepreneurial option or not. The paper will first look at the advantages before delving into the disadvantages. I will then provide my verdict on whether the process is a viable entrepreneurial option based on my findings. 2.0 Literature Review 2.1 Advantages of Buying an Existing Business This section provides ideal reasons why an entrepreneur would consider buying an existing business instead of starting one from scratch. 2.1.1 The buyer skips the dreaded start-up stage As earlier mentioned, starting a new business may be dreary and risky especially considering the statistics of failed start-ups available today. A buyer may thus benefit by buying an already established business which helps him/her to skip the first stage that carries the most risk. Buying a business means that the business has passed the test of time and that its model and operations are proven to succeed. Additionally, the buyer enjoys the assurance that comes with a near autonomy of the business operations with them having been honed by the owner during the start-up stage. The buyer of the existing business also does not have to hassle for employees and other vital resources in a business since these may be part of the inherited properties of the business. This saves the buyer important time, energy and finances through processes such as recruitments and hiring. The saved resources can then be invested elsewhere in the business for expansion purposes (Sutherland, 2008: 32). 2.1.2 Buying a business means inheriting customers, brand and business systems One of the main considerations that a buyer should make before engaging in buying an existing business is to determine the business’ brand and popularity in its market. A viable business for purchase should have all these qualities which have been tried and tested for performance. This provides the buyer with an assurance that the business operations and processes are well-positioned to allow efficiency for good performance. With this, the business saves the buyer the necessary resources such as money and time which could have been spent in developing the same in a start-up business. Additionally, the buyer has an opportunity to make amendments to the new business where deemed necessary. On the topic of brand, an existing business will probably have an easier time and use a little effort in reassuring loyal customers that their preferred services and products will remain unchanged in the new ownership. This is made possible if the business already has a respected brand that has a recognized reputation in its market. The buyer should, therefore, take note to ensure that the business has the right image and reputation, otherwise it might prove difficult to convince the customers that the business is destined for a positive change in the new ownership. 2.1.3 Instant cash flow (profits) Buying an existing business ideally provides the new owner with instant cash flow unlike if it were for the start-up business. Profitability in such a case is far more assured than in a new business which might take a longer and probably an unknown time before it can realize the same. Depending on the foundation laid by the initial owner for the business, a buyer can focus on other areas of improving the premise such as marketing and better staffing which makes the business more profitable in a shorter time. This is contrary to the tedious and time-consuming activities endured for start-up businesses that means spending a lot of time and finances in basic processes of a start-up such as purchases of stationery, hiring and making supplier contracts. These activities certainly do not lead to direct generation of cash flow and thus skipping them by buying a business will provide the competitive edge for the buyer (Kakkar, 2009: 74). 2.1.4 Buying a business is less risky than starting one This is a controversial statement which has drawn debates from various circles in the business world. For example, some entrepreneurs opine that starting a business is less risky than buying one. However, it is the majority’s opinion that buying a business provides lower risks to an entrepreneur (Ryan, 2012; Strauss, 2003; Norman, 1999). Nevertheless, risk can be described as relative. For example, it would make more economic sense to borrow a loan from a lending institution to purchase a business than investing the same loan money into an unproven start-up. It is in this light that a majority of the entrepreneurs will find it less risky to purchase a business than starting one from scratch (Steingold, 2011). 2.1.5 Other advantages of buying an existing business include; The financial records obtained from an existing are as important as good sales in a business. A strong financial record is important for most processes and activities in a business such as application for credit or lending from new suppliers. The buyer thus may benefit from this by relying on the existing financial records of the business to gain access to such services in less hassle (Swart, 2002: 97). Finally, the new business owner might consider learning from the past failure of the business by having the seller serve as his/her mentor in the operations and running of the business (Stephenson and Mintzer, 2008). 2.2 Disadvantages of a buying a business Everything has its pros and cons. As such, buying an existing business has its shadier side as well. The earlier section widely examined the brighter side of this practice based on what various literature materials have documented over the course of time. This section will provide the disadvantages of buying an existing business as observed by various scholars and entrepreneurs. 2.2.1 High cost of buying a business As expected, the cost of buying an established business can be fairly high based on several factors such as the business location, stage of development and the owner’s valuation among others. The main reasons for the high valuation are based on the fact that the initial owner has already done all the ground and rough work such as creating a customer base and a business brand, goodwill and the business concept among other details. This makes the cost of buying an established business understandably higher than it would cost to start a new business (Frankel, 2013). 2.2.2 Possible concealed complications associated with the business A business could undergo various challenges in its operations such as image issues or complications emanating from legal grounds thus leading to an acute loss of business. The owner of such a business may find it difficult enduring the challenges and instead opt to sell it out to willing buyers. The new owner may not adequately understand the implications of such inherited complications at the time of purchasing the business and thus posing a risk of the business turning into a fail. A prime example involves receivables that are included as part of the business value only for the buyer to find out later that they were indeed non-collectable. This and many other incidents make it a risk to buy a business although, with due diligence and research on the side of the buyer, this risk can be reduced considerably (Greene, 2012; Longenecker, 2012: 87). 2.2.3 Disgruntled and unmotivated staff In this case, an advantage may turn to a disadvantage in that the trained staff inherited by the new owner might not accept the new management thus serving as an impediment to the success of the business due to their reduced productivity. In other cases, the staff may find it difficult to adapt to new changes introduced in the business after the change of ownership thus leading to sustained clashes and ultimately loss of motivation to deliver. 2.2.4 Loss of customers The new business owner might strive to convince the existing business customer base to remain loyal to the business to no avail. The success of the business with its customer base under the initial owners may not necessarily translate into a smooth ride with the new owner. On the other hand, a business that has been losing its reputation and relevance in a market might prove even more challenging when it comes to retaining or attracting new customers once it changes ownership. It is, therefore, important that the new owner formulates a strategy to weigh and ensure that new business keeps a substantial size of the customer base while devising ways to attract new ones. 2.2.5 More money may be necessary for investment in the business Often, buying an existing business may seem like an obvious path to business success to the buyer. However, the business needs some time (in some cases taking months) before the new owner realizes the profitability of the acquired business. This, therefore, means that the buyer may require more investment for budgeting for services such as professional fees and employees’ wages at the beginning. 3.0 Discussion The paper has so far looked at both sides of the implications of buying an existing business (in comparison to starting one from scratch). Evidently, the discussion has shown more support for the notion that buying an existing business is indeed an advantage meaning the benefits of taking this route outweigh the demerits that come with it. Additionally, I opine that with enough research on the side of the buyer, most of the disadvantages outlined in the earlier section are manageably avoidable. For example, the buyer should be keen enough to avoid most of the pitfalls that come with poor evaluation and interpretation of the business. The buyer should dig deeper to understand the reasons why the business is being sold. If certain inconsistencies are noted in the business or the transactions, the buyer should be quick enough to discern and probably turn down the offer. On the other hand, the advantages of buying an already established business are far more proven than the risk of starting one from scratch. The main advantages are clear and convincing. For example, I am convinced enough about the one on making profits more quickly as opposed to starting out a new business and waiting for a time to start realizing consistency in sales and the profits. Additionally, it is also noted from the majority of literature works used for this paper that there is always that initial stage where most new businesses fail. This is especially true considering that most new businesses take a longer time beyond what the owner expected and thus most owners end up despairing. Buying an already established business thus certainly lowers this form of risk. My baseline is that the buyer has a responsibility in determining if the purchase is feasible and whether the business has practical prospects for future growth. 4.0 Conclusion The paper has discussed various aspects of buying an existing business, outlining the advantages and the disadvantages of engaging in the same. The key advantage of buying an existing business to a buyer is certainly the fewer hassles that are contrary to what it entails to starting a new business from scratch. Conversely, the main demerit of buying an existing business is the high cost that comes with it. However, buying a business is more advantageous than starting a new one and is thus a viable entrepreneurial option. References Ashton, R. (2013). How to start your own business for entrepreneurs. Harlow, U.K.: Pearson Education Frankel, S. (2013). Mergers and acquisitions basics the key steps of acquisitions, divestitures, and investments. Hoboken, N.J.: Wiley.  Gerber, M. (1995). The E-myth revisited why most small businesses dont work and what to do about it. New York, N.Y.: Harper Business Greene, C. L. (2012). Entrepreneurship: ideas in action. Mason, OH: South-Western Cengage Learning. Kakkar, A. (2009). Small Business Management Concepts & Techniques for Improving Decisions. New Delhi: Global India Pubns. Longenecker, J. G. (2012). Small business management: launching and growing entrepreneurial ventures. Mason, OH: South-Western Cengage Learning. Marcovici, M. (2014). How a useless startup burns 25 millions in 3 days but then. Norderstedt: Books on Demand Norman, J. (1999). What no one ever tells you about starting your own business: real life start-up advice from 101 successful entrepreneurs. Chicago, Ill: Upstart Pub. Ryan, S. (2012). Personal financial literacy. Mason, Ohio: South-Western/Cengage. Steingold, F. (2011). The complete guide to buying a business. Berkeley: CA, Nolo. Stephenson, J. and Mintzer, R.. (2008). Ultimate homebased business handbook: how to start, run and grow your own profitable business. [Irvine, Calif.]: Entrepreneur Press. Strauss, D. (2003). The business start-up kit: [everything you need to know about starting and growing your own business]. Chicago: Ill, Dearborn. Sutherland, J. (2008). Essential Business Studies for Aqa As Le. Dublin: Folens Ltd. Swart, N. (2002). Starting or buying your own business or a franchise. Lansdowne, South Africa: Juta. Teece, D. J. (2010). Business models, business strategy and innovation. Long range planning, vol. 43, no. 2, April, pp. 172-194. Read More