So, you want to take the leap and start your own business. You’re full of innovative ideas, entrepreneurial spirit, and big dreams. But you also face sobering facts – roughly 20% of new businesses fail within the first year, according to the Bureau of Labor Statistics. In North Carolina, that number rises to roughly 21% of businesses failing within one year and 45% within five years.
Before putting everything on the line for a startup, have you considered buying an existing small business instead?
There are excellent arguments on both sides. Purchasing a small business often reduces risk and startup costs, given their established brand and revenue. However, launching your own venture allows for more flexibility, control, and innovation. We’ll explore the key pros and cons to help you make the right decision.
Buying an existing business offers some immediate advantages compared to the long, uncertain road of launching a startup. With proven products, customers, systems, and cash flow already in place, much of the heavy lifting and guesswork has been done for you.
Imagine inheriting a turnkey operation with brand recognition, loyal patrons, quality equipment, and skilled talent in place on day one. By purchasing a business with a track record of profitability, you skip much of the risky trial-and-error and crippling costs that doom many startups.
Starting a business from scratch often requires major initial investments:
But buying an existing business means the domain names, logos, inventory, permits, intellectual property, and vendor accounts are all ready for you to inherit. With revenue already flowing in, the breakeven period can be shortened significantly.
While buying an existing business marks less uncertainty than a startup, you still need to thoroughly research and review the business before signing on the dotted line. Carefully vet financial records, tax filings, legal documentation, and operations capacity to uncover any lurking liabilities.
Inspect customer concentration levels so revenue doesn’t crate if one big account leaves. Interview staff and key patrons to take the pulse on supplier relationships, brand reputation, and management dynamics. This due diligence allows you to structure terms, pricing, and a 100-day post-purchase plan accordingly.
Buying a business may still sound easier than building one, but consider this – acquiring an existing company means you’ll trade off more control over strategy, operations, and innovation for that pre-existing foundation.
For starters, purchasing an established business requires having or securing serious capital upfront. Company valuation (or purchase price) will stem from the current revenue, assets, customer pipeline, and perceived potential under your guidance. The precise cost of acquiring the business will vary widely based on the size, sector, and profitability, amongst other other factors.
However, this does not take into account miscellaneous broker, legal, and government registration fees. Even conservatively, you can often expect to pay six figures or higher.
Once the previous owner hands you the keys, another reality sets in – settling in. For example, as you put your strategic stamp on operations in hopes of upgrading certain existing technology, you might receive pushback from existing personnel who are accustomed to the old systems.
Rebranding and overhauling processes can risk alienating longtime customers. And depending on how archaic the infrastructure is, that major tech upgrade could prove time-consuming and disruptive if it is not handled carefully.
Also, while buying a proven business model allows you to hit the ground running, substantial changes will likely await before any existing revenue streams are fully stabilized.
Early on, consider making sweeping revisions to the core product line or business model can be perilous before cementing operational control. Once you’ve earned customer trust and reinforced sound foundations, then innovation efforts can shift front and center.
If, after weighing the pros and cons, business acquisition is still in the lead, let’s shift gears to maximizing your odds of success. Here are key steps to follow from our experience guiding clients through successful purchases.
Initially, leverage experienced professionals to assist with valuation, due diligence, contract negotiations, and transition strategy. Recruiting assistance from the legal advisors at Johnson Legal, as well as accountants, commercial real estate agents, insurance brokers, and finance partners early on, can help structure a deal that caters to your goals.
Once under contract, verification becomes paramount. Dig meticulously into financial records, tax filings, operational metrics, customer concentration, vendor accounts, employee matters, regulatory compliance, lawsuits or liens, intellectual property, and insurance policies. Getting an accurate understanding of revenues and costs will allow you to set realistic performance benchmarks and timelines post-purchase.
Speaking of post-purchase, bridge that gap with structured onboarding. Well before the keys exchange hands, craft a 90 or 120-day transition plan that reflects your priorities for items such as financial audits, personnel evaluations, customer outreach, rebranding, operational streamlining, and innovation roadmaps. This will allow you to hit the ground running on day one, even as the long-term vision continues to take shape.
In deciding between purchasing an existing small business versus launching your own, finding the right balance will boil down to your personal appetite for risk and your preference for control. Johnson Legal hopes weighing these key considerations will help equip you to pursue business ownership with eyes wide open.
Here at Johnson Legal, our passion is guiding entrepreneurs and business owners through moments of transition – whether acquiring an existing business or launching a new one. If you have any remaining questions about charting the optimal path forward or could use counsel to negotiate your next steps, our door is always open. Contact us today to get the conversation started.
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 Expertise.com.
