Whether to start a business from scratch or buy an existing one may not be an easy decision for you as an aspiring entrepreneur.
Your head could be spinning with several questions on the merits and demerits of both options, but there is no risk-free venture you can settle for.
Statistics show that 20% of start-ups fail in the first year, while 34.6% of acquisitions fail in the first year. (Source: Fundera)
Based on this data, you may quickly conclude that building your business from scratch is better than buying an existing franchise.
However, there is more to this statistic than meets the eye. This blog post will examine opportunities and challenges that face building and buying a business.
We will also discuss both options’ advantages and disadvantages to know which provides you with a better safety net. Let’s begin.
You might also enjoy reading: 8 Long-Term Growth Metrics Every Start-up Should Track.
Starting a Business From Scratch
The prospect of building your own business using fresh ideas can be exciting and dreadful at the same time. And with many start-up loans for small businesses readily available, you know that seed capital may not be a problem.
However, a report by Fundera using data from the U.S. Bureau of Labor Statistics sends a different message. The data showed that
- 20% of start-ups fail in their first year.
- 30% fail in year two.
- 50% of these small businesses fail in year five.
Approximately 70% of small businesses are going out of business by their 10th year! Not a palatable reality for entrepreneurs, right?
Before we go deeper into the challenges of starting and building your business from ground zero, let’s discuss from merits of doing so.
Advantages Of Starting a Business From Scratch
Starting a new business could fire you to success if you have researched and identified a potential market gap or thought of a fantastic new product or service.
The challenge is gathering enough courage and starting the business. However, here are some reasons for taking that leap of faith:
1- Starting a Business From Scratch needs a small investment
While buying a business requires a huge amount of money, starting a business from scratch is relatively cheaper.
You can start a business from scratch even if you only have a couple of hundred dollars. Starting an online business could even be cheaper since you will not incur rental costs, product development, testing, storage, or shipping costs.
After creating a website, you can set up a dropshipping business with virtually no extra cost.
2- You Can Change The Shape And Identity Of The Business
Since the business idea is yours, you can alter the business as you see fit. Starting your own business is like having soft clay in your hand; you can make any model you want.
You have absolute control over your brand identity, business model, and niche of operation. You determine the overall growth trajectory of your franchise and dictate its values.
On the other hand, buying an established business is like having a pre-molded and fired shape in your hands. As a new owner, you may paint it with a different color, but you may not change its identity without destroying it.
3- You Dictate Your Time And Financial Well-Being
As an entrepreneur, you are not reliant on an employer. You have control of hours worked, income, and daily tasks.
Although you may not have other factors like Google algorithm updates and consumers’ responses to your products, you still influence several income-contributing factors.
You can control the inventory and increase your income by venturing into other business models.
4- You Can Tap Into Your Existing Skills
If you come from the corporate world of employment and want to shift to running a business, you can leverage the skill you gathered during your career.
You do not need an MBA from some exotic university to run a business. You can succeed if you have a passion for your business idea and are willing to learn and cooperate with others.
Disadvantages Of Starting a Business From Scratch
Building a business from an idea is not all cozy. Here are some challenges you may want to contend with.
5- Starting a Business From Scratch Requires High Skillset
Some entrepreneurs make the mistake of underestimating the skills need to start a business.
You must be highly organized, incredibly driven, and an excellent planner.
Why do you need these skill sets as an entrepreneur? You are your start-up’s CEO and will face many duties and responsibilities, such as administrative duties and hiring and managing employees. If you don’t have these skills, your business may not go beyond an idea.
6- It May Be Challenging To Acquire Finances
Although banks may offer government-backed SBA loans to start-ups, the money is often small.
You may need to seek another source of finances, but investors are often skeptical of funding start-ups, fearing they may lose their funds if your business fails.
If you are stuck on ideas to fund your start-up, check out this list of 8 practical ways to finance a business.
7- It Takes Time Before The Profit Comes
Before your start-up starts to generate profit, it may run at a loss. You will pump in more capital to finance operations during the business’s infancy.
If you are not patient, you may lose faith and abandon your ship. It is not a nice experience to spend money without seeing a positive return on investment, but that is how great businesses start.
8- Changes In Regulations Can Adversely Affect Your Business
Changes in government regulations can render your business obsolete or illegal. Some regulations could also affect your operation and profitability.
On the other hand, it is unlikely that changes in government regulations will adversely affect an established business.
Because of these drawbacks, would you choose to buy an existing franchise?
Well, let’s discuss buying a business and how it compares with starting a venture.
How About Buying a Business?
Buying a business could be expensive, especially if the business generates a good profit margin and has a loyal customer base.
However, you may need to research the right business type before acquisition. Getting into an unfamiliar industry can prove fatal because the business may not benefit from your skills or experience.
Now, for a fair comparison, let’s consider the pros and cons of buying an established business.
You might also wonder how much money you need to get started in eCommerce; I encourage you to check out this article.
What Are The Advantages Of Buying a Business Rather Than Starting From Scratch?
Some merits of buying a business include the following:
1- Buying a Business Comes With An Established Customer Base
If you buy a business, you are buying its customers, which means you will spend less on advertising.
Your marketing budget will be focused on attracting additional customers because you are starting from somewhere.
2- Stable Cash Flow
Starting a business means that profit is pumped back into the business to stabilize the start-up.
However, when you buy an operating business, you will have a profit-generating asset that will start repaying your initial investment immediately.
Your investment into the business can be used for business growth, not survival.
3- Buying a Business Comes With Established Assets
When you purchase an existing business, you buy more than the brand. You will have existing revenue streams, tried and tested systems, trusted supplier relationships, and a working framework.
If you start a business from scratch, these things often take time to build.
Yours is to leverage existing success to become an authority within your niche. You will have more time to grow the business because most things have already been cared for by the previous owner.
4- Faster ROI
Entrepreneurs venture into business because they want to make money.
Starting a business from scratch may be a long route to breaking into any industry. It could take months to reach where profits outweigh your investments and costs.
On the other hand, buying an established business skips the development stage to the growth stage.
Buying a business allows you to develop a faster ROI strategy, especially for online businesses.
5- Buying a Business Might Be a Safer Capital Investment
With an established franchise, many potential pitfalls have been navigated. Furthermore, you have historical data at your disposal to inform your decisions.
You already know customer behavior from previous PPC campaigns. Therefore, you are less likely to waste time and money learning these dynamics.
You can safely invest your capital in productive areas of the business.
Disadvantages Of Buying a Business
Buying an established business also has its pitfalls. Consider some of these.
6- Buying a Business Is Expensive
Buying an operational business does not require pocket change. You will need to dig deep into your pockets and seek loans to finance this endeavor.
What makes an established business expensive? You are buying customers, established revenue streams, goodwill, strong supplier relationship, employees, and more.
7- The Business May Not Be Doing Well
Buying an existing business may not be fruitful if the industry or the business is not doing well. You may inherit a dying venture if you do not do your due diligence.
The equipment may be outdated, forcing you to invest more than you bargained for.
8- Existing Business Might Come With Employee Issues
Since you are inheriting the business, you may end up with a discouraged and unmotivated workforce. Hiring new employees or building trust and motivating existing employees can be daunting.
Plus, the previous owner may have unfavorable contractual obligations hindering business continuity.
Buying Vs. Building: Which is better?
The debate of buying vs. building is long and may not end today. However, these are what we have learned from this discussion. Starting a business from scratch does not need huge upfront costs and allows you to determine the start-up’s identity. However, it takes a long before you start realizing any profits.
Other vulnerabilities of starting your own business include navigating market needs, developing products, building supplier relationships, and marketing.
On the other hand, buying an established business needs a huge upfront capital investment. However, you can recover this investment quickly since you will start making profits immediately.
Most start-up challenges are already surpassed; therefore, you can skip the troublesome development phase and head straight into the growing phase.
So, if you want to switch from a 9-5 job to a business or increase your income without many challenges, buying an existing business is a direct and secure route to achieving your goals.
Buying vs. Building a business: which one do you think is better for you?