Pros & cons of buying an existing business

Existing businesses are often sold when owners want to retire, move or do something else and may not have a family member to turn the business over to. Buying an existing business has a few advantages and disadvantages. You may be able to pick up where someone else left off with an existing location, product or service and network of employees, suppliers, and customers. However, you may also inherit messes the owners have left behind, like soured relationships and a poor reputation. Depending on the business you choose, the benefits and detriments can vary greatly. Let’s take a look at a few pros and cons of buying an existing business.

Pros of buying an existing business

  • As the owner, the business decisions are in your hands. You set your own vision for the company and make your own plans about how things will go.
  • There’s room for creativity and innovation. There may not be as much room as there would be if you were starting your own company, but still much more room than there would be in a franchise.
  • It’s often easier to get financing in place for an established business than for a brand new one, because existing businesses have financial records which show past profitability. Also, if you choose a company with a good history, your likelihood of success increases.
  • Equipment, staff, inventory, location and customers likely already exist. That cuts out a whole lot of those first steps and research that a business owner has to undertake when starting from scratch.
  • The product or service is already being produced, distributed and sold. You won’t need to worry as much about logistics and the finer details of starting this process at the beginning of your venture.
  • Relationships with suppliers, banks, investors, trade creditors, and other sources of financial supportare already established.
  • If you choose carefully, the equipment needed for production and operations processes should already be established. By studying existing processes, you can determine strengths, weaknesses, limitations and capabilities in advance.
  • You don’t have to pay any franchising fees or royalties. You may even be able to get a really good deal, particularly if the owner happens to be forced to sell at a lower price than the actual value of the business’ assets.

Cons of buying an existing business

  • Although they already exist, location, equipment and assets may be unusable or out-dated. You may have to spend a great deal of time and money replacing these assets.
  • A lot of inventory loses its value very quickly after it has been purchased. Don’t get stuck buying a great deal of “dead” stock, and make sure you know the quality of inventory you’re paying for.
  • The location may not be good for this business. You could end up paying as much as you paid for the entire company just to move to a more profitable location.
  • Depending on why the previous owner wanted out, the company may have no growth potential. Take some time to assess your plans for growth before deciding to buy.
  • Relationships with banks, suppliers, customers, and staff already exist — but what if the last owner was a jerk? It can take a long time to earn back a person’s or a company’s respect, trust and loyalty.
  • Watch for hidden reasons behind the sale of the company. Make sure the business’ great location the business can continue as your location. Is the lease renewable? Are the local conditions or economy worsening?
  • Check out the staff. Are they qualified? Are they productive? Do they have a good track record? Staff can be fired and re-hired, but you don’t want to spend a great deal of resources doing so.
  • Be careful of any legal issues. Make sure there are no lawsuits or unlawful activities that are either currently taking place or that took place in the past.
  • Perhaps the most challenging snag with buying an existing business is determining what the business is worth and how much you should pay for it. Be aware and get assistance from a trained business valuation accountant. If an existing business owner is reluctant to show their accounting records to you — the prospective buyer — or your accountant, stay away, far, far away.
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