The Pros and Cons of Buying a Business

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When is it a good idea to buy a business? Would it be a better idea to expand your existing company or launch a start-up?

Given the stakes, it’s important to thoroughly weigh your business goals, risk tolerance, and market opportunities before making an acquisition. Here are pros and cons of buying a business.

Pros

  • Track record—Buying a business gives you an established customer base, team, business plan, and operation. No need to start from scratch.
  • Income—The best acquisition targets are likely to have solid sales and profits already. A new venture, on the other hand, can take a long time to build revenue and become profitable, and the risk of failure is significant. Only about half of Canadian start-ups are still operating after five years, according to Innovation, Science and Economic Development Canada.
  • Financing—The assets of the company you are buying can be used to help secure the financing needed for the purchase. Lenders are less likely to take a chance on a start-up.
  • Vendor assistance—Existing owners often help finance the purchase of their business by providing vendor financing. Besides being a good source of patient capital, the vendor’s investment provides motivation to the former owner to help make a smooth transition.
  • Market knowledge—Acquisition may be a good strategy if you want to expand into a new industry or geographic location where you lack contacts and knowledge.

Cons

  • Poor fit—It can be difficult to find the right company to acquire—one that is a good fit with your existing business culture and strategic goals. A poor choice can cause the acquisition to become a sinkhole for your time, money and other resources.
  • Integration challenges—Integrating a new company into your existing operations can be harder and more time consuming than entrepreneurs realize. Expected payoffs often don’t materialize as quickly as planned.
  • Vision conflict—It may be harder to impose your vision on a company that already has its culture and history than if you were to expand a business you already own. Some entrepreneurs like the challenge and excitement of starting an entirely new company or embarking on an expansion where they can put their stamp on from the beginning.
  • Dependence on the old guard—A rocky ownership change can prompt key staff to leave and imperil customer relationships. That can be especially problematic in a business that is highly dependent on the involvement of the owner or certain.

 

 

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