Buying an Established Business Vs A Start-up and Why?

Some experts have predicted that a good portion of the workforce will be working in a self-employment capacity in the next decade; business ownership is becoming increasingly more appealing to many people.

Entrepreneurship and small business can be risky for the inexperienced, however a great way to reduce some of that risk is to buy an established business which has already demonstrated an ability to successfully operate and generate profit! Of course business buyers must also look at educating themselves on the business buying process to ensure they buy the right business at the correct business value.

Obviously a successfully established business comes at a price and generally you would expect to pay more to buy a business than to start one from scratch.

Looking at the financial side for a moment – It is estimated that less than 10% of all start-up businesses are able to successfully secure the financing required at the outset. This is due to the high level of perceived risk start-ups pose to lenders because every aspect of the business is unproven and certainly not appealing to most lenders.

Depending on the type of business, certain lenders may provide some level of funding however, it will be dependent on a number of factors such as the cash flow, numbers, assets – stock and the security you personally have available to offer the bank.

So, more and more business owners realise the difficulty in financing a business purchase and are open to genuine buyers negotiating for some level of vendor finance, business owners are also looking at different ways to package and present their business, hopeful to attract the right buyer.

It is obvious when you compare buying an established business to starting your own your chances of success are still clearly best when the opportunity is established.

Here are some key advantages of buying a business vs. start-up:

1. Business processes and proven methods

2. Proven products, services, sales strategies and marketing

3. An established business generates cash flow day one

4. An established business has much less chance of failure

5. Customer base and Suppliers established

6. Vendor will train and help a buyer understand the business

7. Vendor may assist the buyer with financing

8. Lenders are more willing to finance an established business

9. Business is already successful and credible

10. Employees are there and should not require training

Securing affordable financing is so much easier when buying an established business with a positive cash flow, consistent stability and a proven track record versus starting your own because there is no history – it is seen as ‘unknown’ territory. Having the ‘unknown’ details already established and worked out by the previous owner certainly lowers the risk value when buying a small business or company.

Also do not forget an established business or company should already have a relationship with a business banking manager, if the banks view the business as a good customer they will be keen to retain it, the current vendor normally is quite happy to make the introduction.

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