What type of business should I buy?
4 minutes read
Whether you want to buy a new business or expand one you’re already operating, you have a lot of choices. Here’s a breakdown of some common options—with pros and cons for each.
Whichever approach you choose to support your growth, remember the most important thing is that buying or licensing a business or product should always support your core strategy and business goals.
1. License a franchise
With a franchise, you license the name, products, operational practices and other elements of an established business and/or brand. They’re an appealing option for entrepreneurs who want something readymade they can get up and running quickly.
- You get an established name and business model that’s familiar to your market
- You gain instant access to a wealth of business knowledge and a proven methodology
- You have the advantage of built-in publicity and much higher purchase power as part of a larger parent entity
- Franchises can be expensive to license and operate because you have to use specific equipment and inventory, pay royalties and other fees, and buy from specific suppliers (who may not always offer the best prices)
- You have limited freedom to try new approaches or take the business in a different direction
- There is less control over business hours, inventory and pricing
For more guidance on buying a franchise, check out the Canadian Franchise Association website.
2. Buy a whole business
Buying an existing business lets you skip the expensive—and risky—start-up stage and gives you an established market and customer base to start serving right away. There are a few ways to go about this.
Buy a business as a strategic acquisition
Incorporating another business into your company can be an effective way to achieve your strategic business goals, whether you’re looking to diversify your offerings, enter a new market or expand your team.
- You get access to qualified employees and expertise to grow your team, offer new products or expand into new markets
- You can gain an advantage over your competition by expanding quickly and taking on a larger market share
- You could potentially eliminate a competitor by making it part of your own company
- Merging businesses is complex and takes time and focus, and can actually slow down your business growth
- You could potentially lose key talent or decrease productivity through the integration process
Buy a supplier or distribution channel
To gain more control over your supply and distribution chain, you might want to buy an upstream or downstream partner. If you operate a retail store, for example, you could purchase a manufacturer that supplies your inventory. If you’re a manufacturer, you might buy the retailer.
- You reduce your dependence on others to ensure smooth delivery of your products and services
- You take on more accountability for product and service quality by eliminating the middleman
- You can reduce your production costs by avoiding markups or extra steps and by improving your buying power
- Taking on more of your supply chain functions could require skills that your current team—and you—may not have
- There is a risk of splitting your focus, which can harm your main line of business
- Your relationships with competitors can become more complicated (and there can be other unintended consequences) when you take on supply or distribution for other companies
Buy a sub-optimal or failing business
Buying a business that’s not doing well or has even gone into receivership may seem counterintuitive, but it can be a savvy move. The key is to understand why the business is failing to identify unexploited opportunities and determine whether the business can be turned around.
A word of caution to sellers of declining businesses, a 2017 BDC study found that only 8% of potential buyers were willing to consider buying these types of companies.
- You can buy a business for a lower price than if it were doing well
- You gain opportunities to take the company in a new direction or experiment with new products, services or methodologies
- It can be hard to secure financing for a venture with a poor track record and questionable forecasts
- An underperforming business comes with significant risk and no guarantee of success; it should not be undertaken by someone who does not have significant entrepreneurial experience
- It can be difficult to solve historical problems inherited with the business
- There is potential for a long period of unprofitability before the business becomes profitable again
3. License a product
You don’t have to buy an entire business to grow. You can expand your offering by licensing the right to manufacture a product designed by someone else, such as a new invention the patent holder isn’t able to produce themselves or a trademarked product from another country.
- You can keep up with technological advancements without investing time and money on research and development
- You gain access to experts for detailed instructions on how to manufacture the new product
- You can diversify your product offering without having to develop new skill sets or hire new staff with expertise in a new field
- You could have to pay royalties for a long time—even if the product doesn’t sell
- Someone else’s disruptive technology could make the licensed product obsolete
- You may end up with restrictions on your ability to develop similar products or technologies internally, or to make improvements to the licensed product