The pros and cons of buying a business
3 minutes read
When is it a good idea to buy a business? Would it be a better idea to expand your existing company or launch a start-up?
Given the stakes, it’s important to thoroughly weigh your business goals, risk tolerance and market opportunities before making an acquisition. Here are pros and cons of buying a business.
Pros of buying a business
Track record—Buying a business gives you an established customer base, team, business plan and operation. No need to start from scratch.
Income—The best acquisition targets are likely to already have solid sales and profits. A new venture, on the other hand, can take a long time to build revenue and become profitable, and the risk of failure is significant. Only about half of Canadian start-ups are still operating after five years, according to Innovation, Science and Economic Development Canada.
Financing—The assets of the company you are buying can be used to help secure financing needed for the purchase. Lenders are less likely to take a chance on a start-up.
Vendor assistance—Existing owners often help finance the purchase of their business by providing vendor financing. Besides being a good source of patient capital, the vendor’s investment provides motivation to the former owner to help make a smooth transition.
Market knowledge—Acquisition may be a good strategy if you want to expand into a new industry or geographic location where you lack contacts and knowledge.
Cons of buying a business
Poor fit—It can be difficult to find the right company to acquire—one that is a good fit with your existing business culture and strategic goals. A poor choice can cause the acquisition to become a sinkhole for your time, money and other resources.
Integration challenges—Integrating a new company into your existing operations can be harder and more time consuming than entrepreneurs realize. Expected payoffs often don’t materialize as quickly as planned.
Vision conflict—It may be harder to impose your vision on a company that already has its own culture and history than if you were to expand a business you already own. Some entrepreneurs like the challenge and excitement of starting an entirely new company or embarking on an expansion where they can put their stamp on from the beginning.
Dependence on the old guard—A rocky ownership change can prompt key staff to leave and imperil customer relationships. That can be especially problematic in a business that is highly dependent on the involvement of the owner or certain employees.
The decision may rest on market and growth opportunities. Acquisition may be a good strategy if prospective companies are undervalued because of market conditions. Conversely, if valuations are high, you may need to obtain more financing, potentially reducing the long-term returns from the acquisition.
A good exercise is to compare the cost of acquiring an existing business versus starting a similar one from scratch. This comparison should include not only the financial expense and projected returns, but also the cost in terms of time and attention for you and your team and disruption to your other projects.
Whatever your decision, the buying will have a greater chance of succeeding if you have a clear, detailed understanding of why you are proceeding and how the venture will meet your business goals.