Which of the following is the advantage of starting a business from scratch instead of buying an existing business?

Both starting and buying a business have their own set of benefits and risks. This varies significantly depending on the type of business and reason for sale which we will explain and compare below.

We’ll look into both these avenues so that you can make an informed decision on whether to start a business or to buy an existing one.

Advantages of buying a business

It is considered less risky to buy a business than to start a business from scratch from a financier’s point of view according to Business Queensland. It is generally considered a lower risk if you purchase a well managed, profitable business that has been operating for years. The advantages listed below won’t always turn out true but will stand true in many of the businesses sold.

Read: Our complete guide on buying a business.

• Buying an established business means immediate cash flow.
• Do not need to go through the growing pains of starting up a new business.
• Plans, policies, and procedures in place.
• Financial history, easier to get financed.
• Goodwill, existing clientele, suppliers, equipment, plant and stock.
• Businesses may be undervalued due to owners need to sell fast.

Disadvantages of buying a business

Not every business sold is a viable business or good value for money. Some businesses are overpriced, unprofitable or under-performing. Some businesses seem like good value due to their low price tag but these types of businesses usually take dedication and resources to turn around.

• Plant and equipment may be in need of an upgrade.
• Potentially capital intensive to turn around business.
• Goodwill of business is due to the previous owner.
• Financial history is not an indicator of future success.
• Businesses may be overvalued based on previous earnings.

Advantages of starting a business

Depending on the business you are starting, it may be low risk, high risk or anything in between. Some businesses are extremely high risk due to the capital outlay required to get started. Most business owners will tell you that they made countless mistakes when they first started. This is true for all start-up businesses, and sometimes those business mistakes can be costly.

Read: Our complete guide on starting a business.

• Can be cheaper to start your own business if you know what you’re doing.
• You will learn everything about the business as you build it up.
• Your business success is dependent on your execution.
• No legacy issues from existing businesses.

Disadvantages of starting a business

Starting a business is glamourised but it can be extremely brutal. For those uninitiated, it takes countless work hours to get started.

• Outlay can be higher than buying a business due to plant, equipment, and stock.
• You start with no goodwill or clientele.
• No immediate cash flow or goodwill.
• Need to negotiate lease and council permits.

Comparison

If you are deciding up whether you should start or buy a business, you need to work out what is important to you based on your individual circumstances. Everyone is different, so there is no single answer.

The best thing to do is to tailor your decision and strategy to your needs. At the end of the day, having a business is an alternative to working, and much like work, it makes it much easier to stay passionate when you enjoy the work that you do.

If you want to learn more about buying a business, feel free to check out our guides on buying a business.

There are pros and cons to both buying a business and starting one from scratch, but for many people the positives come down firmly in the buying camp.

Here are ten reasons why buying an existing business may be better than starting one: 

1. Easier to secure finance

Most lenders are more inclined to lend money for the purchase of an established business rather than supporting an unknown start-up.

From their point of view, there is less risk involved in financing a business that has already proven it is able to generate an income. 

2. Income from day one

Most start-ups go through an initial phase when they do not generate an income – for some, this can be three years or more.

During this period, it may be necessary to shell out money for the premises itself, equipment and it's installation, initial stock and materials, fixtures and fittings, legal and professional fees, a license, uniforms...the list goes on.

Without finance in place or an alternative income, this stage can be tricky for new business owners and it is easy to become demotivated. 

3. Established brand

With an existing business you are buying into a recognisable brand with a track record, complete with all the trademarks, copyright and websites associated with it.

This gives customers, suppliers, lenders and other contacts a confidence in your business that they may not have when interacting with an unknown start-up. 

4. Instant customer access

An existing business also has customers at the ready.

You can use various strategies and marketing to build on that customer base, but you don’t have the task of building it from scratch. 

5. Established network of contacts

A large chunk of the time and energy involved in starting a business goes towards establishing a network of contacts.

Good supplier and marketing contacts are a valuable asset to any business and if your new enterprise has some on their books, you will hit the ground running.

In addition, like money lenders, suppliers and marketing companies are more likely to offer favourable terms to a business that has been around for a while.

6. Focus on growing the business

With a start-up, an entrepreneur has to channel all their energy into getting the business off the ground and this can be time-consuming and exhausting.

In contrast, taking over an established business means you are free to focus on the particular parts of the business that most need attention, aiding the growth of the enterprise as a whole. 

7. Income to put back into the business

With a start-up, lack of finance to do what you really want with the business can be frustrating. Cash is eaten up in buying the resources needed to get things up and running, and dreams are left by the wayside.

With a steady income from an established business, you have more freedom in how you choose to re-invest this money.

8. Trained employees in place

Just as it takes time to build up a network of suppliers and other contacts, it also takes time to build up and train a team of employees. These people are already in place in an existing business.

This can make it easier to implement strategies for growth and development. It also means there is a trained team that can keep things running if you want to take time off.

9. Less risk

There is obviously less financial risk for lenders involved in buying a new business and it is also a safer option for the potential business owner.

Providing the business is doing reasonably well, it should continue to do so. In contrast, starting a new business is a jump into the unknown as far as financial security is concerned.

10. Less work

Starting up a new business can often become all-consuming. With so much to do, it is easy to allow the business to completely take over your life.

Those who don’t have huge amounts of passion and energy for the business can find that they begin to resent this.

Taking over an established business means that business practices have been streamlined and with existing employees who know the ropes, it won't be necessary to work around the clock.

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