Start v Buy a Business. Pros, Cons & Statistics

Have you ever found yourself pondering the question: Is it better to start a business from scratch or buy an existing one?  I get asked this a lot.   What should you consider when deciding between buying or starting a business? 

There are generally two ways to become a business owner:

• Buy an existing company with an established customer base, a roster of trained employees and proven cash flow 

• Go down the start up route and build your idea to success.

Starting from scratch may be best for the entrepreneur with a novel idea. On the other hand, those seeking to buy an independent lifestyle, to dictate their own hours and produce more immediate cash flow, have the option to buy their future.

Lets start with starting a business as this seems to often be the preferred option.

Pros: It allows you to design all aspects, from the business model and branding to operational processes and company culture. You can be highly adaptable and responsive to market changes. You have the freedom to pivot your business strategy as needed without being constrained by existing systems and structures.  While startups can be costly, the initial investment is often lower than buying an established business. You can start small and scale up as your business grows.  Building a business from the ground up can be incredibly fulfilling. The sense of accomplishment and pride that comes from seeing your vision come to life is a significant motivator for many entrepreneurs.

Cons: Startups come with a high level of risk and uncertainty. It can take time to build a customer base, generate revenue, and achieve profitability. Many startups fail within the first few years. Unlike buying an established business, startups typically take longer to become profitable. You may need to invest significant time and resources before seeing any financial returns.  Establishing a brand and gaining customer trust takes time and effort. Competing against well established businesses can be challenging and resource-intensive and makes it more difficult to scale up.

But your dream business might already exist, are you ready to take it over?  Which brings us on to buying a business 

Pros: One of the most significant is the pre-existing brand recognition and loyal customer base. This can save you considerable time and effort in building brand awareness.   Existing businesses come with established relationships with suppliers, customers, and other stakeholders. These relationships can be invaluable for smooth operations and future growth.   An existing business has an established business model and operational processes. This reduces the uncertainty and risk associated with starting a new business.  Unlike a startup, which might take months or years to become profitable, an established business can provide immediate cash flow. This can be crucial for sustaining operations and providing financial stability.  Lenders and investors are often more willing to finance an existing business with a proven track record than a new, unproven startup. This can make securing funding easier. Because the business has proven to be viable and has a history that you can examine, the risk element is reduced significantly.  It has existing employees and staff. They are trained and experienced. No downtime wasted on hiring and training.   It has customers and clients. A new business will require significant sales efforts just to get that first sale. An existing business likely has sales in the pipeline on the day you take over.   If you already have a business in a complementary or even the same niche that you’d like to expand, buying an existing business that you can “bolt-on” is FAR easier than launching a new division or subsidiary.  

An established business provides revenue, and profit, on DAY ONE.

Cons: Buying a business can be more expensive upfront than starting a new one. The initial investment includes the purchase price, legal fees, and possibly renovation or upgrade costs.  You may also inherit its problems, such as outdated equipment, legal issues, or negative public perception, and you might be bound by existing contracts, business practices, and the previous owner's decisions.  Thorough due diligence is essential to identify and mitigate these risks.   The success of the business may have been heavily reliant on the previous owner’s relationships and expertise. Transitioning these relationships to new ownership can sometimes be challenging.

The Statistics

I am often approached by people who enquire about the cost of purchasing a business and then ask themselves the question, “Maybe it would be cheaper to start my own business rather than buy one”.   It might be.  But if you fail, it will be an expensive mistake. It is the classic “number eight wire” Kiwi culture. Whilst, in theory, starting your own business sounds exciting, the reality is actually quite different.

Stats NZ shows us that 44% of all start-ups fail in the first 36 months. When we look at the success rate of acquiring existing businesses there is a greater than 90% success rate.   I am a business broker and my company sells 500 plus business a year and we monitor the ongoing survival rate.  For every business sold we see a success rate above 98%.  Simply put, the business is still operating 36 months after purchase versus the start-up death rate which has 44% of start-ups failing within 36 months.

Finally, the often-argued points of Cost Effectiveness and Quick Profit:  The cost-effectiveness and speed of making a profit depend on the specific business and market conditions for both a purchase and a start up.  Generally, starting a business from scratch is often considered more cost-effective since you can control your initial investment. However, if you find an established business with strong potential, the immediate cash flow might offset the higher acquisition cost. Buying an established business with a solid customer base and proven revenue stream can yield quicker profits. In contrast, starting a business requires time to build brand awareness, attract customers, and establish a foothold in the market.  It can sometimes take more investment that the cost of buying a going concern to fund the business while it develops and until profitable

Buying an existing business with revenue history is almost always going to have a higher chance of success than starting from scratch. An existing business will have a financial history from which you will be able to gain a better understanding of the dynamics of the business and make informed decisions.  Even if profitability has been low, your strengths may lend themselves to turning it into a viable venture. The financials will give you the ability to confirm what the business has done in the past and identify opportunities to move forward.