The Pros and Cons of Buying a Business, and the Critical Make or Buy Business Decision

The make or buy business decision is very important to a budding entrepreneur. Do you go from ground zero or buy a business that already has a track record? Even if that means buying a business with a track record that isn’t all that good.

You need to ask yourself if you want to go through the hassles of starting with absolutely nothing and working your way up or taking over where someone else left off. 

Some businesses may be better off starting from scratch if the costs of entry into the market are low as it is with businesses like consulting. As another example, very often it’s better to buy a retail-based business where a build-out of a location would be very expensive and time consuming.

Any potential business buyer needs to know and understand the typical odds they are facing once they have decided to be their own boss. Although this information seems discouraging, there of course is hope. Believe it or not, there is more on the pro side than the con side in buying a business instead of starting from nothing.

Do you have all of the information you need for the decision to make or buy a business?  Have you gone over every pro and con of buying a business to be satisfied with the decision?

(Get a head start by picking up a free report on preparing to buy a business.)

Beyond the pros and cons of buying a business, the question is: Will you survive?

In 1997, 2.9 million businesses were launched from scratch. According to recent studies by the US Census Bureau, over 80% of those companies failed by the end of their first year in business. Of those that have made it to the 10 year mark this year, only about 25% of them will still be around to see year 11.

Those sound like pretty dismal numbers, but in that same year of 1997, 700,000 small businesses were purchased instead of being started from scratch. Although I don’t know of any statistics tracking these businesses, I am willing to bet that many of them are still around today being run by the same buyer or it was sold and is still around with the third or fourth owner.

That is why you will often find small businesses for sale that claim 30 years in business with 5, 10 , 15, etc. years with the current owner.

How do I know that buying a business is a good idea for you to consider?

Owning various businesses (built from scratch and bought) for the last 15 years, being an advisor for many entrepreneurs and brokering business sales gives me the tale of the tape to make that bet. From this background, I am positive that the survival rate of a business is higher when bought instead of started from nothing.

Anything can happen to turn a good business into a bad idea. But the momentum from an existing business, when all of your buying homework has been done, gives a much better chance to the new owner for survival and outright success.

Why is there a higher survival rate for a business where the decision has been made to buy rather than make one from scratch?

It’s all about a running start. This is the plus you get when your decision is to buy rather than make a business. Even if you buy a business that is barely making a profit, there is momentum. That momentum gives you the time to determine what you need to change in order to make the business work better. If it is already doing well, it allows you time to figure out how to keep it that way.

When you start from scratch, you will most likely spend less money upfront but possibly more money over time. You will also be starting out with no physical structure (office, store, etc.) and probably very little business operations knowledge. But more importantly you will have NO CUSTOMERS! It could be weeks, but most likely months, before you have any revenue at all. But even so, the bills still must be paid.

A purchased business has both structure and customers. This allows you a much better chance to learn some business operations skills and truly see where you can improve the business and run it your way. That, my friend, is MOMENTUM.

How do I make certain that my purchased momentum will not stall?

I don’t recommend buying a business that is barely surviving. If that was your plan though because you wanted to buy cheap and build with your business/industry knowledge, then it will probably work for you. It still has the structure in place to give you momentum.

Buying the highest profiting business with the most growth potential you can is always the best plan. Part of the thought process is saying to yourself “how much can I afford to pay” and “do I have the skills to keep the business running as is or better”. These are key points to have answers for in order to avoid a stall caused by being under capitalized, not knowing enough about the industry and/or lack of business operations skills.

Not everyone can buy a business that nets the owner $100k+ a year. If that were the case everyone would. But, everyone does have the opportunity in this great country of ours to build a business to that level or more. Using your skills, getting help where you need it and using the momentum of the business you purchase is the way to achieve that goal.

Being prepared by having all of these items lined up before even looking for a business to buy is extremely important. If not, you will waste the momentum you bought and will need to claw for survival or get out quick.

What are the odds of successfully completing a business purchase?

It is interesting and important for a business buyer to know that the industry average for putting in an offer that is accepted and that offer actually going to the closing table is 50%. Why you ask? Again it comes down to preparation. This time though, it is often the seller’s lack of preparation that causes the problem.

As this statistic states, not every deal works out. If you are prepared, then you will uncover any possible discrepancies in the seller’s information during your due diligence of the business. Being well prepared, you will also be able to renegotiate after these discoveries or walk away and be happy with that decision.

How can I make sure that I have made the right decision to buy vs. make a business?

Once you know what kind of business you want to be in, deciding how you will achieve the goal of being a business owner is extremely important. Buying a business instead of starting from scratch is a statistically better idea. BUT… it means very little if you are not a prepared/educated buyer, which includes getting help from people with experience in buying and operating a business.

Be mentally, physically and monetarily prepared to buy a business or start one from scratch. This will allow you to go with your gut and your heart to know you made the right decision on the path you have taken. If you don’t have a fire in your belly over this exciting decision to be a business owner, then you have made the wrong choice. It’s that simple.