For many people the prospect of giving up their job and steady paycheck to start or buy a business is unthinkable, even terrifying. In fact, a study sponsored by Weebly and conducted by Wakefield Research found that while most Americans think about quitting their job twice a week, one third of those surveyed fear starting a business more than jumping out of an airplane. No doubt there is an abundance of fear about starting or buying a business, but is it worth the risk? Are those fears warranted?
Starting a business is risky and in fact most startups fail within the first few years. SBA and Census Bureau data show that that 30% of new businesses fail in the first two years, 50% in the first five years and 66% in the first ten years. So there is justification for the fear of starting a business, but what about buying an existing business?
Buying an existing business is entirely different. The business has already survived the startup and embryonic phase and is likely a mature business. The products or services are established and proven. Employees are trained and in place. Customer relationships are established.
Start Up Risks vs Buying an Established Business
|Startup Advantages||Established Business Advantages|
|1. Fulfilling-building your dream.||1. Lower risk; established customer base plus products & services.|
|2. You get to do it your way.||2. SBA or seller financing to purchase business|
|3. You can choose your location.||3. Immediate cash flow|
|4. Possibly less cash upfront (but not in the long term).||4. Established Businesses Survive Downturns |
(see SBA data below)
|5. You can start slow and ease into it.||5. No startup phase, it’s up and running.|
|Startup Risks||Established Business Risks|
|1. Unproven product-service.||1. Every business, even good ones, have problems which you inherit.|
|2. Unknown brand, product, service.||2. Problems you may miss during Due Diligence.|
|3. No cash flow initially and slow ramp up.||3. Industry or economic downturn.|
|4. No bank financing available, most startups funded with credit cards and cash (see SBA data below).||4. You are not capable of running the business.|
|5. Industry or economic downturn.|
|6. Expansion financing will be difficult to obtain for several years other than personal credit.|
|7. You are not successful in running the business.|
There is less risk involved in buying a business and problems within the business can become opportunities for the new buyer. The majority of sellers want to see a buyer of their business continue to be successful and will oftentimes be willing to stay on after the training period with a consulting fee in order to facilitate a smooth transition with both customers and employees.
For more information about buying a business and how to buy a business see the book written by Bill Grunau, “Own Your Future, Straight Talk About How to Buy a Business and Build Your Future”.
More SBA Data and Infographics