While most entrepreneurs have the dream of starting up a company from scratch, it’s worthwhile to ponder whether purchasing an existing business might be your better option. Each situation (and entrepreneur) is unique, but here are some things to consider as you weigh this decision.
When Does it Make Sense to Buy an Existing Company?
You should strongly consider purchasing a business if you’re worried about getting funding. Lending institutions are more eager to give entrepreneurs a loan if they’re able to show recurring revenue and profitability. This can be difficult for start-up owners who have yet to show market success. While many aspiring entrepreneurs are able to secure loans for a new enterprise, you could obtain a much larger loan if you buy a business that has been around for a while.
Purchasing an existing business might also be a better option if you simply don’t have the resources to weather the start-up phase. It’s common for business owners to go several years without turning a profit. Perhaps you don’t want to take on the financial risks that come with not knowing when you’ll be able to support yourself through your new business. In that case, stepping into an established business is likely the better course of action.
When Does it Make Sense to Start Your Own Company?
There’s always a good reason why a business owner has decided to sell their company. In many cases, the reason could be that the enterprise simply is no longer profitable. You should always perform thorough due diligence on any company you’re thinking about purchasing. It could end up being more expensive to correct issues with an existing business than simply starting a new one. Likewise, if you see an opening for a new product or service that isn’t provided by any existing company, starting a new enterprise might be the better way to go.
Established businesses also come with established relationships, business practices, overhead, etc. You may need to invest a lot more capital up front to take on an existing company versus building up a new one over time. If you aren’t careful, you also may get saddled with flawed vendor contracts, difficult employees, pre-existing debt instruments, and other headaches that were not of your making but are now yours to manage. If you have a good team and a solid business plan in place, pulling the trigger on your start-up dream might be right idea after all.
Conclusion
No matter which option you choose, there are plenty of legal considerations you will need to address, and discussing these with an attorney before you commit your time and resources is a good idea. Integrated General Counsel has been setting California entrepreneurs on the path to success since 2010, and we would be happy to assist you too. Ready to set up a consultation? Give us a call today at (925) 399-1529 for more information.
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