Pros and Cons of Buying an Existing Business: A Practical Guide

Pros and Cons of Buying an Existing Business: A Practical Guide

Many entrepreneurs dream of owning their own company one day. If you’re eager to escape the 9-to-5 and be your own boss, you stand at a familiar crossroads – buy an existing business or start your own from scratch?

There are good reasons for both routes.

In this guide, we’ll explore the distinct pros and cons of acquiring an established venture so you can make the right move for your goals and risk tolerance.

At Johnson Legal, our business lawyers have provided legal guidance to buyers on scores of business acquisitions over the past years. We’ve seen these deals catalyze buyer success just as often as falter under the pressures of expectations versus reality. Carefully weighing the advantages and disadvantages sets you up for growth rather than regret.

The Lure of Buying an Existing Business

First, let’s spotlight why purchasing a business attracts many entrepreneurs in the first place. The idea of a ready-to-go company with built-in brand recognition, trained staff, thriving products or services, and an existing customer base can seem like a fast track to success and profits.

In your mind’s eye, you envision stepping into the revenue stream quickly, leveraging hard-won market share, and avoiding rookie mistakes.

The reality often proves more complicated, of course. But those rosy visions aren’t necessarily wrong either. Under the right circumstances, buying into an established operation can help you bypass the riskiest and most labor-intensive phases of starting from the ground up. When done strategically, you gain traction faster as the new owner.

With some veteran insight into pitfalls, you can assess if acquiring all (or some of) what another entrepreneur built makes sense for your own business buying journey. Let’s break down the central upsides and downsides our clients typically encounter.

The Central Pros of Buying an Existing Business

If the following advantages resonate with your needs and capabilities as a potential buyer, purchasing a company could catapult you ahead:

Instant Brand Recognition & Loyal Customers

Starting from zero brand awareness with no customer base makes early revenue generation an uphill battle. Buying a business with some regional or industry foothold provides built-in name recognition and an existing book of business.

You inherit any hard-earned loyalty, along with customer data, to retain and upsell them from day one.

Of course, customer retention depends greatly on their experience transitioning to the new owner. Handled thoughtfully, you may grow the base faster by leveraging the credibility of past performance.

Bypassing Startup Capital Needs

Speaking of the earliest stages, getting any new business off the ground requires major capital outlays just to open the doors. Market research, location scouting, equipment purchases, inventory, permitting, marketing plans, professional fees, staffing – pre-launch costs add up alarmingly fast.

Not so when you opt to purchase instead, with the previous investment already secured over time by the existing owner. Although the buy price still demands a large financial output, your startup costs decrease substantially, having infrastructure already established.

Inheriting Market Share

Piggybacking the point above, buying an existing operation provides a running start on market share compared to entering a competitive niche completely green. An established brand with visibility, happy repeat customers, quality listings/reviews and confident staffing builds community trust through the years.

Assuming proper branding and integrity carries over post-purchase, inheriting that hard-won share shouldn’t require you to fully re-prove your worth to consumers. Industry connections similarly smooth the path to sales based on past relationship building. Starting from scratch demands massive effort to grab a share when buyers see you as unproven.

Potential for Turnkey Cash Flow

Every new business endures months or years of expenses piled up before actual profit manifests. Between upfront outlays, encountering obstacles, staff training, and establishing operations, positive cash rarely flows quickly when building a customer base from nothing.

Who can keep the lights on without revenue coming back in?

Enter the primary motivation for most buyers – acquiring an existing money-making enterprise with financial track records proving stable cash flow tied to an existing base of paying customers. Assuming you avoid major hiccups and customer attrition post-purchase, the sales can continue virtually uninterrupted if you play the transition right.

Operational Knowledge You Haven’t Earned Yet

Even veteran entrepreneurs encounter learning curves when launching an entirely new venture. Buying an existing company means you can rely on and build upon institutional knowledge built up by previous operators familiar with the ups and downs of your particular products/services.

Minimized effort in getting up to speed makes it easier to focus on increasing profit margins and other owner priorities ahead, like marketing expansions. Mentorship tapering off from sellers who stay on post-purchase provides insight that might take years to unpack solo.

The Central Cons to Weigh Heavily

Now that we’ve covered the central advantages spurring buyers to pounce on existing operations, we owe it to you to spotlight the reverse.

Arm yourself against disappointment or surprise by preparing for the core downsides past clients have encountered:

Upfront Investment Capital Demands

Yes, buying an operation that’s up and running demands less startup capital than building your own foundations…but make no mistake, acquisition requires significant capital outlay regardless.

Established enterprises with years behind them accrue market value, and investors want their payout. Exceptional existing ventures often sell at premiums between one to three times yearly profits/revenue.

For small businesses, average sale prices in the U.S. hover between $ 100k and $ 150k. Larger companies soar into the millions. Deep pockets or financing always factor big when buying existing brands. Finding legitimate businesses priced at bargain rates screams caution rather than deal, so temper expectations.

Unseen Flaws Lurk Beneath Surface Success

Due diligence serves you well before acquiring any business. Without scrutinizing financial records, tax documents, operational budgets, staffing challenges past and present, legal entanglements, customer comments, and marketplace competitors, you risk buying serious problems hiding underneath seeming stability or recent sales slumps.

The decade spent building present cash flow may rest on slippery ground from unseen cracks in procedures, supplier relationships, regulatory changes, or outdated technology sinking competitiveness.

What red flags peak behind the curtain to hurt valuation or necessitate capital infusions if forced fixes don’t work?

Integrating Existing Staff & Company Culture

You might inherit experienced staff already trained in the company’s workflow under previous leadership. Take care not to underestimate the vulnerability of employee morale and turnover when news breaks of acquisition, especially if financial stability looked uncertain before purchase.

Workers wondering if the new boss plans layoffs or sweeping operational changes destroy the fabric of company culture fast. Many buyers underestimate the staff’s lynchpin role or overestimate their own ability to stabilize personnel. Rebuilding after a mass talent exodus rarely proceeds smoothly, especially mid-sales cycle. Tread carefully.

Learning Curves Despite Secondhand Experience

While buying existing operations provides a crash course in internal processes through the team you inherit, limitations still exist. Long before you became the new owner on record, decisions get made, patterns cemented, relationships cultivated with vendors/advisors, and institutional precedents set.

Employees indoctrinated into the old way of doing business may struggle to adapt procedures to your leadership style or modernization efforts. Some resistance is inevitable. Also, plan to spend months wrapping your head around pre-existing business software essential for management. Assume growing pains upfront.

Restrictions Imposed by Original Owners

Original owners often retain partial controlling stakes or structured buyouts, enabling ongoing financial ties to the businesses they sell. This scenario invites various restrictions on operational changes or executive decisions post-purchase until you satisfy agreed terms, like hitting periodic revenue benchmarks for the seller over the years.

Within exhaustive contracts, expect contingencies shielding previous owners from risk tied to changes if aspects weaken. Review restrictions carefully since limited control impedes implementing the vision or improvements you feel best. If financing or timeline terms prove overly burdensome? Reconsider.

Key Due Diligence Can Make or Break Success

Because buying an existing business stake so much money upfront based on past perceived performance, diving deep during due diligence separates successful transitions from disastrous purchases. Your business law attorney guides the verification process.

But here’s what we check under the hood:

  • Financial records – tax filings, sales summaries, payroll docs, operating budgets, liability obligations. Any red flags?
  • Facilities/equipment/tech – Inspector assessments uncover needed repairs or upgrades undermining operations down the line?
  • Leadership/staff stability – Will vital team members stay post-purchase? Who might retire soon?
  • Customer service practices – Any hidden dissatisfaction in client reviews/comments? How many key accounts might leave?
  • Marketplace dynamics – Who leads now, and are any disruptors changing the niche landscape?

Getting objective legal and financial consultants helps assess current business health and whether real revenue potential exists going forward under new management.

Deciding What Works for Your Goals & Experience

Our business attorneys have guided clients just like you for years to immensely successful acquisitions and beyond. But no perfect formula exists to boost the odds since every buyer comes to the table with different capabilities and burning needs.

Aspects swaying you towards buying include:

  • Industry expertise to build upon existing operations
  • Sufficient startup experience to stabilize transitions
  • Strong partners for hands-on mentoring
  • Patient leadership style and change management skills
  • Change tolerance for updating systems

If the above resonates strongly, view buying as a strategic fast track to grow an enterprise you already understand quite well. But with long runways anticipated getting started solo, acquiring now might distract focus better spent slowly building your own brand.

Either route has merit depending on what success looks like for you personally in business and beyond. Let’s connect today to explore your options in more detail.

With upfront planning and eyes wide open going in, buying or starting presents paths to genuine opportunity worth the travails ahead. You’ve got this!

Contact us today to get started.

Author Bio

Shane T. Johnson is the CEO and Managing Partner of Johnson Legal, an estate planning and business law firm in Wilmington, NC. With years of experience in estate and business law, he has zealously represented clients in various legal matters, including small business formation and purchasing, estate planning, probate, domestic violence, and other legal cases.

Shane received his Juris Doctor from the University of Wyoming and is a member of the North Carolina Bar Association. He has received numerous accolades for her work, including being named among the Best Probate Lawyers in Wilmington by

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