Launching a Startup or Purchasing an Existing Business. What’s right for you?

The answer to this question depends mostly on what you want to accomplish through business ownership. Both approaches have positives and negatives. Ultimately, your situation will dictate which approach is right for you.
 
Launching a Startup
 
We dream of being modern day pioneers and blazing new trails, but a cautionary phrase comes to mind almost immediately – beware what you wish for! Everybody dreams of creating and marketing the next big thing or “building the better mousetrap”. No doubt about it, if you can accomplish such a feat you will almost certainly encounter untold riches.
 
It is unfair and not very realistic to equate every startup with the wild notions of a dreamer. Those scenarios are more likely the exceptions. In most cases, it comes down to a much more practical decision. Say you are a tax accountant, engineer or computer programmer who only wishes to work for yourself. You could start a firm, or you could purchase an existing firm. Let’s assume you try to start your own firm from scratch. What are the advantages and disadvantages?
 
Startup – Advantages
 

• Start with a clean slate. The company becomes whatever you decide. No need to undue or update broken, outdated processes or address employee performance issues.
• Many startups require minimal capital investment. No burdensome debt service payments.
• There are no payroll or overhead costs at the start. You bring on expenses required to grow at a pace that fits your budget and comfort zone.  
• There are no leases or contracts that need to be reassigned. Leases and contracts can be difficult to assign and doing so often comes with monetary penalties or escalated costs.

 
Startup – Disadvantages
 

• Nobody knows who you are. You MUST start selling immediately! If you are uncomfortable selling, your first expense best be hiring somebody who can sell or your startup will be doomed from the start.
• You don’t start with a paycheck. It may take weeks or years before you can start drawing a salary from the business. How long can you go without getting paid?
• Lenders don’t like lending money to startups. Borrowing terms may be very harsh depending on who you get to fund your business. The business or concept is unproven. Lenders react accordingly.
• No training. You may have a whole network of advisors and podcasts to guide you, but ultimately the operation will be designed by you. There is no outgoing owner to train you.

 
Buying an Existing Business
 
Buying an existing business may not be as appealing as being the maverick who blazes a new trail – but it is a lot more predictable. Let’s go back to the example of the tax accountant, engineer or computer programmer pursuing self-employment. Instead of launching their own firm, they buy an existing firm. This path also comes with advantages and disadvantages.  
 
Existing Business – Advantages
 

• The business is proven and has an existing customer/client base. If you bought a successful business, there is already an owner’s salary baked into the current operation.
• There are employees, equipment, and processes in place. In most cases, the outgoing owner is available to train you through a transition period.
• If you need to borrow money to purchase or expand the business, there are more options with better terms. Lenders like predictability. They like success even better.

 
Existing Business – Disadvantages
 

• Buying an existing business requires a cash investment, taking on debt or both. Day one you are on the hook to make debt service payments so the business must be successful and producing sufficient income to service the debt. You also inherit a payroll to meet.
• The good news is there are employees, equipment and processes in place. The bad news may be that the employees include underperformers, the equipment is old/outdated, and the processes broken. Talent is hard to find and equipment is expensive to repair or replace.
• Sellers will always try to put the best spin on whatever they are selling. Business owners are no different. Your purchase will only be as good as your due diligence. You may discover there are changing market trends or long-term relationships with the prior owner that kept business relationships in place.  You inherit whatever problems the business had at the time of purchase. You don’t start with a clean slate.

 
A startup may not come with any of the blemishes an established company possesses, but it also lacks the perks. More people are willing to fix things that are wrong with an existing business if they are also drawing a paycheck while fixing them. There is also no guarantee a startup won’t soon experience many of the same problems.
 
If you are considering a startup, make sure you have a marketing and sales plan firmly in place. I don’t care if the person launching the startup is the best accountant, plumber, electrician, architect or baker on the planet. You will not be successful if nobody knows you exist. Don’t like or want to market and sell? You are not alone. Many of us don’t. If that is the case for you, then you MUST hire somebody to market and sell on your behalf. If not, you are doomed! I have seen it countless time. For my money, this is the number one reason startups fail.
 
Considering a launching a startup or buying an existing business? Get the help of a professional to guide you through the decision making process. Weigh the pros and cons. Make an informed decision based on your comfort zone, budget, talents and interests. 

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