With the business world becoming more competitive day by day, the chances of success when starting a business from scratch are becoming even slimmer.
According to a report by Fundera, using data from the Bureau of Labor Statistics in the United States, approximately 50% of businesses will have failed by the end of their fifth year. What’s even more interesting is only 30% of businesses will still be running by the tenth year – a 70% failure rate.
It’s important to consider that “still running” is not an indication of profitability, so this means that even those businesses still operating a decade on may just be getting by.
In an age where startups and shiny new businesses are glamourised, often without any substance, it’s very easy to overlook existing businesses and the untapped potential they offer.
In this article we’re going to look at how acquiring an existing business, rather than starting from the ground up, could be your answer to success.
Reasons to Buy an Existing Business
Proof of concept
Unlike starting a business from scratch, a running concern has already established a proof of concept. This means that there is a confirmation of a market for the goods or service the business provides.
One of the reasons that many startups fail is that entrepreneurs fail to correctly assess whether there is indeed potential for a business to be successful in the marketplace. By acquiring an existing business, individuals benefit from a degree of certainty that the concept works, and there are customers willing to buy those goods or services.
Avoid hefty startup costs
Startup costs can greatly impact a new business, and when you combine the lack of initial revenue, it can put a large amount of stress on the founders and even their new employees.
According to an article by Shopify, the average business spends $40,000 in its first year.
By purchasing a business, this doesn’t come into play, and the hurdle of getting past the initial startup costs has already been crossed.
Instant revenue
Another great reason to buy an existing business is the benefit of receiving revenue immediately. One of the biggest challenges of a new business is to find customers and raise awareness, and this takes time.
Cashflow is so important in a business, and having revenue coming in on day one is a massive benefit.
Buying an existing business means there will already be a customer base and transactions occurring, meaning the new owner will receive revenue from day one.
Reputation and branding
Reputation and brand building are one of the most important aspects of any business. A good reputation and strong brand can be what sets a business apart, and keeps it ahead of its competition. While considered a somewhat intangible benefit, this can have a direct impact on the business in terms of longevity, revenue and profitability, as well as its valuation as time goes on.
Ability to raise finance
Whilst loans and financing are available for startup businesses, capital amounts and the rate of interest are not always favourable, which can make it even more difficult for a new business trying to get off the ground. An existing business will already have a proven track record and company accounts. This means a lender can accurately value the company and offer a potential purchaser a larger loan, and possible a lower rate being a commercial business loan.
There are also alternative options such as seller financing and government grants/loans in certain circumstances.
Anyone offering a business loan would also be able to see the existing company accounts, forecast revenue and profits more accurately thereby reducing risk and increasing the choice of financial products on offer. The possibilities really do open up when a business has already been operating and there are hard numbers to go by.
Existing team of employees
As we all know, a great business always has a great team of employees working together towards a collective goal. Creating a positive environment and strong company ethos is one of the most difficult aspects of not just running, but growing a successful business. Finding the right talent can be an arduous and costly process, so being able to tap into an existing team can help skyrocket your success.
Summary
With an ever-changing business landscape, it seems the variables and potential pitfalls of starting a business from the ground up are never ending. With a failure rate of up to 70%, it comes as no surprise then, that acquiring, not starting, a business could be your answer to success.
With multiple benefits to an existing business such as an existing workforce and a strong reputation in the market, specific factors like an established proof of concept and not having to worry about navigating high startup costs can truly be invaluable to entrepreneurs.
It is precisely this winning combination of de-risking the business and building on a strong foundation that could be your key to success.