With so many baby boomers heading to retirement, the coming years will be a good time to buy a business in Canada. Among those, some will be handed over to family members but at least 50% of those businesses will be available to outside buyers. Based on this there are definitely opportunities to buy an existing business.
So why do entrepreneurs want to buy a business rather than start a new business from scratch? One of the key benefits of buying a business rather than starting one from scratch is that an acquisition allows you to skip the expensive—and risky—start-up stage.
Here are some of the key advantages and disadvantages of buying a business.
Advantages of Buying a Business
1. Brand Recognition
Buying an existing business gives you an established business foundation. It can take companies many years to build a loyal client base, existing operational structure and established management. Having all of this on day 1 saves time and costs of establishing these keys to success.
2. Predictable Revenue
One of the best things about targeted acquisition is that the company already has solid sales and profits. On the other hand, a new venture can take a long time to build revenue and become profitable, and the risk of failure in the first 5 years is significant.
You will need financing to buy any business whether you are buying shares of the company or just the assets of the company. You can buy an existing company with very little or no money down.
Disadvantages of Buying a Business
1. Determining Right Fit
So, how can you find the right company to buy? Especially if you are buying a business to expand your own existing business. A poor choice can cause the acquisition to become a draw on your time, money and resources.
2. Operational Challenges
When you are starting a business from scratch you can put your stamp on it from the very beginning. You get to define and form the culture of the company. This is a challenge when you buy a company. It is a lot harder to introduce a new vision and culture to a company that already has its own established culture and history. Ownership change can cause many staff to leave and cause an impact on business. This is especially problematic in a business that is highly dependent on the owner or a small group of key employees.
Buying an existing business can come with liability issues that have the potential to cause serious losses. Therefore, ensuring proper structuring and thorough due diligence before the purchase can go a long way towards protecting you as a buyer. There are many things to consider when buying a business and there are many ways to structure the transaction. The key to properly structuring the transaction will be to decide if you want to buy the assets of the company only or purchase the company as a whole by buying its shares. Usually, if you are buying the asset of the company then you are (the purchasing company) not liable for existing debit and liabilities unless there is an exception where the buyer agrees to assume the debts and liabilities in exchange for a lower sales price. So be sure to do your due diligence first.
Ultimately the deciding factor may be the market and growth opportunities for the business you are buying. Buying an existing company may be a good idea if the prospective company is undervalued due to market conditions. It’s good practice to compare the cost of buying an existing business versus starting a similar business from scratch.