There are several options to explore if you’re thinking of becoming an entrepreneur. You could buy an existing business where all the hard work has been done and you simply take over, or you could start your own company from scratch. The best option for you will depend on several factors like your available capital, personal skills and interests, and what you’re looking to achieve by running a company.
In this article, company formation agent, 1st Formations, explores the main advantages and drawbacks of buying an existing business versus starting your own company from the ground up. If you’re considering going into business but are unsure which way to go about it, this guide will take you through the fundamental pros and cons of each approach.
Advantages of buying an existing business
One of the toughest parts of being an entrepreneur is simply getting started, but buying an existing business can make it easier in several ways. Here are some of the main pros to consider when it comes to buying an existing business:
The company is already established
A considerable risk that new businesses face is whether the concept pans out. Depending on the sector you’re looking to enter and the audience you want to reach, it can be incredibly difficult to penetrate the market as a new player, especially if it’s a particularly congested area such as food and drink manufacturing or e-commerce.
However, this isn’t a worry when buying an existing business as the company is likely to already be established in its industry.
Let’s not forget just how difficult it is to create a profitable company from scratch. The Office of National Statistics reveals that Q1 2023 saw the second-highest business closure rate in the UK in 6 years. The overall business death rate has also been on a gradual incline over the last few years, leaving 20% of small businesses likely to fail in their first year, Fundera reports.
If you’re a first-time entrepreneur, it’s vital not to underestimate the difficulty of creating a new company that becomes successful and sustainable. It takes a lot of time, money, and effort, and you need a solid business plan. However, buying an existing company means that it has already established its clients, partners, workforce, and business and marketing plans.
Whether you’re going into business on your own or with a partner, you can omit some of these initial difficulties that come with forming a new business by buying an existing, established company.
Financing may be easier to secure
Another big advantage of buying an existing business is that your financing options may be greater. When small start-ups apply for loans, banks look for a trustworthy credit score and the eligibility criteria can be quite strict.
Data and analytics platform, Experian, advises that a good business credit score is 80 or over. This means that the company is considered low-risk and opens up better deals on financial products and lower interest rates. Meanwhile, a credit score of 40-80 is medium risk and 40 and below is seen as high risk and needs improving.
Ultimately, lenders want to see a good chance of the loan being repaid, but it can be hard for new businesses with no track record to prove this. That’s why buying an existing business could be a more suitable option.
But it’s not just banks that could create a barrier for new businesses, many investors are also more comfortable working with established companies that can offer added security and a higher chance of a return on their investment. So, buying an existing business as opposed to starting a new one could considerably open up your financial options and make loans and investments easier to secure.
Immediate cash flow
Buying an existing business means that it is already operational and generating cash flow. In contrast, when starting a new company, it takes time to build it up to a point where it’s ready to bring money in.
When buying an existing business, it’s essential to analyse its current financial health to ensure that its forecast matches your needs and expectations, but generally, access to immediate cash flow means you don’t have to worry about breaking even and making and maintaining a profit. Instead, you can capitalise on the existing income, giving you more time to focus on developing the company further.
Brand identity and reputation are incredibly difficult to establish, and it can take a long time for your customers to start trusting you. Without this, your business can’t operate, so when buying an existing business, there’s potential to buy a company that has already formed a solid reputation and loyal customer base.
Research by Deloitte shows that 88% of customers who trust a brand will buy again and the market value of trusted brands exceeds competitors by up to 400%. These are enormous statistics that take a long time for a start-up to achieve, but by buying the right existing business, you can avoid these challenges and focus on developing a reputable company.
Disadvantages of buying an existing business
While there are several big advantages, there are also some cons to consider if you’re thinking about buying an existing business rather than starting your own. Here are some of the main challenges to weigh up:
High upfront costs
Buying an existing business can require a large investment upfront and can often be more expensive than starting a new company. When it comes to upfront costs, there are 3 key areas to consider: the purchase price, legal fees, and due diligence expenses.
The purchase will depend on several factors like the industry, location, business size, and the company’s financial health. Before buying an existing business, it’s vital to do your homework and understand the average purchase price in that sector.
When buying an existing business, you’ll need legal assistance. Again, these costs can vary widely depending on the legal firm you choose, how experienced the solicitor is, and the amount of work required to complete the transaction. Typical solicitor charges range between 1 and 2%, but again, doing your research and choosing an adequate solicitor is vital to make sure the sale is handled correctly and compliantly.
Don’t forget to factor in due diligence expenses. This involves reviewing the company’s economic, legal, and financial health to verify that it is in a suitable position to be sold. Due diligence costs can vary widely depending on the level of assessment you want to carry out, but as a rough estimate, you should expect to pay between 2 and 5% of the total transaction amount.
Finally, all these fees may be considerably higher if you buy a neglected business that requires more attention. Likewise, if you choose a healthy and profitable company, the purchase price may be higher.
High ongoing costs
As well as a potentially costly purchase, there may be additional expenses to consider depending on the condition of the existing business that you are looking to buy. For instance, it may require re-branding, which could result in an extensive cross-departmental workload, external agency costs if you can’t re-brand in-house, and additional marketing costs to advertise your new brand.
Further costs to assess include:
- Office premises: Are the location and rent suitable or do you need to relocate?
- Equipment: Is the existing office equipment usable or do you need to upgrade?
- Staff: Is the team sufficient or do you need to hire additional employees?
There is a lot to think about when buying an existing business and some of the ongoing expenses may be higher than you expect or are willing to pay.
Possible difficulties with current staff
Remember that when buying an existing business, you’re also taking on the employees that come with it. While there are bound to be numerous teething issues, you should consider how current staff may be affected by the change in ownership and how the existing company culture might differ from the changes you want to implement.
Depending on how the transition goes, you could see some employees leave or team morale (and, therefore, productivity) drop. If you need to recruit more staff, that’s another cost to think about and if the team spirit is low, you may need to divert your attention to this to improve productivity and work output.
If you don’t carry out thorough due diligence before buying an existing business, you could be running the risk of taking on additional problems that you’re unaware of before completing the purchase.
There may be some financial trouble that the company is in or there could be difficult partnerships that you don’t know about, which will end up on your plate as the new owner. Depending on what they are, it may make the purchase futile.
Even after conducting a complete business assessment, there might still be some issues that the current owner fails to be honest about, so it’s incredibly difficult to get the entire picture upfront.
Advantages of starting your own business
Now, let’s take a look at some of the pros of starting your own company.
Be in control
First and foremost, you get to work for yourself when you start your own business, meaning that you are in control. This is one of the most common reasons why entrepreneurs form their own companies. You have the freedom to set the business up as you wish based on your passions and interests, work the hours you want, and go into business with the people that you choose.
When you buy an existing company, however, some of these decisions may be made for you. For instance, you could end up with an unwanted business partner, employees that you don’t connect with, or the overall working style may not suit you. As a result, the changes you may want to make could be limited.
However, when starting your own business, you are in complete control, hands-on, and free to make decisions as you see fit without having to adapt to any pre-existing conditions.
Lower and more flexible upfront costs
Another key advantage of starting your own business is that the initial costs tend to be lower and more flexible. You can form your ideal company based on your available capital as opposed to searching for an existing business that matches your criteria.
It’s more realistic to start a new business with little money. For instance, our formation packages start at just £12.99, covering the Companies House filing fee, a free business bank account, a free online company manager, a free domain name for your website, and email copies of your incorporation documents.
Even if you register your business directly with Companies House, the application costs just £12. Meanwhile, acquiring an existing company could cost you thousands.
Perhaps you have limited funds to get started with or you have a family to think about before making these important decisions. No matter your circumstances, you can choose how you set up your own business, how much you want to spend, and when you want to spend it.
Gain entrepreneurial skills and experience
When starting your own business, you’ll gain crucial entrepreneurial skills and experience. From completing a company registration form and marketing your brand to connecting with customers and clients, there’s plenty of essential experience and knowledge to pick up by forming a company from scratch.
Moreover, all that experience is vital to building and running a successful business long-term. If you want to form another company later down the line or buy an existing business, you’ll have first-hand experience and a comprehensive entrepreneurial skillset.
Realise your vision
Finally, starting your own business means that you can really enjoy success when it comes around and realise the vision that you had. You will have your fair share of highs and lows but watching your company flourish from nothing to an operational business with employees, clients, partners, investors, and customers is a truly unique feeling that not many people can say they’ve had.
On the other hand, if you buy an existing business, you are, essentially, buying someone else’s vision. While you can still add your own touch to it and make future decisions, it’ll never 100% be something that you created.
Disadvantages of starting your own business
Just like buying your own business, starting a fresh company also comes with its drawbacks. Let’s look at some of these below.
Working long, hard, and unsociable hours as a new business owner is common knowledge. When starting a new company, you’re likely to need to dedicate all of your time and effort to getting it off the ground. This could lead to burnout, stress, and other health issues.
While entrepreneurs can have other jobs when running their own businesses, juggling both can become unsustainable and chances are that you’ll need to give up your job to focus on your new company.
Difficult to obtain financing
As we mentioned earlier, it’s generally more challenging for a small, inexperienced business to secure financing. Those early stages are when you need financial support the most, but to obtain a loan or bring an investor on board, you’ll need to demonstrate trustworthiness, promise, and sufficient credit history.
Unfortunately, for brand new companies, this is tricky to prove. Also, the loans that are available to you may come with higher interest rates due to the risk involved in financing a start-up.
Lack of guidance
If you’re a first-time entrepreneur and going into business on your own, you won’t have anyone to guide you through the process. Even if you have a business partner from day one, there’ll be a lot of guesswork and uncertainty if neither of you has previous experience in starting a company.
Particularly in the early stages, this can feel very unnerving, and a lot of your progress will be based on trial and error. But when you buy an existing business, you might have managers, directors, and partners already on board to make a smooth transition.
Lack of income
Finally, one of the big cons of starting a new business is the possibility of having no income for a while. Naturally, it takes time to establish a company to a point where it generates a profit and you can afford to pay yourself, but you are likely to have to give up a regular income until then.
Also, depending on performance and progress, this may end up taking longer than your initial projections outline, so you should be prepared to not get paid for longer than expected when starting your own business.
Becoming a business owner comes with its advantages and challenges. Whether you start your own company from scratch or buy an existing business, there are many factors to think about before making a decision.
If you’re considering buying an existing business, for instance, it’s important to remember that the upfront costs can be considerably high, and you may struggle to integrate with the employees. However, it does mean that all the legwork that comes with starting a company has already been done.
Likewise, if you think you may want to start your own company, you should remember that you’re unlikely to have an income for a while and you could struggle to obtain financing. On the other hand, you have the freedom to turn your passion into a career, work for yourself, and be in control.
Both approaches to entrepreneurship require thorough research and planning.
Having formed over 1 million companies, 1st Formations is a leading company formation agent in the UK. They offer a comprehensive set of formation packages to suit your budget and needs, as well as post-incorporation services to make life after incorporation as easy as possible. To find out more about them and their services, visit the 1st Formations website.