Startup vs Acquisition – Which is Best?

You may have your heart set on a startup.  Many bright, hard-working people do.  However, while you’re exploring how to go about launching your own startup, you may want to give some consideration to buying an existing business instead.   

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Why would you do that?  

For many reasons, acquiring an existing business may make good sense.  Although you may have always thought your journey to entrepreneurship would begin with the launch of a startup, buying an existing business may accelerate your journey while still allowing you to apply your innate entrepreneurial skills to make the business successful in the long run.  

Consider these reasons to forgo the startup and instead pursue the acquisition of an existing business:

• • An existing business for sale will have an established customer base, ongoing revenue streams, and brand reputation.  

• • You’ll have the opportunity to expand the customer base by entering new markets, expanding geographically or even focusing on a niche the established business has already tested or one you have a hunch may be fruitful.

• • A brand with a great reputation can be updated if you desire.  This is often necessary if the business you acquire is a family business with many ties to the community.  If successfully executed, the rebranding efforts should improve the existing, good reputation and ultimately improve the business’ bottom line.

• • A good business will have developed effective operating systems and processes and have employees in place who are trained and experienced delivering products and/or services to existing customers.  Having a business with efficient operating systems with effective employees makes a business profitable.  It can take years for a startup to achieve these goals.  Some never do.

• • Every business has established relationships with other businesses, their owners, leaders and employees.  Relationships such as these take many years, sometimes decades, to establish.  When buying an existing business, you’re put in a position to leverage these valuable relationships which serve to enhance the value of your new business.

• • While it may take more capital up front to acquire a business, lenders, including those affiliated with the Small Business Association (SBA), are a viable and readily-available source of capital for your business acquisition.  Many of these lenders will offer working capital loans to new business owners to ensure smooth sailing post-acquisition.

• • Good businesses on the market for sale will offer the new owner immediate cash flow whereas startups can take many years to accomplish positive cash flow.  Having positive cash flow allows a business to grow, while negative cash flow will require the business to tap into cash reserves or be forced to raise additional rounds of financing.  

• • If the acquisition is properly structured, as the new owner you may have many of the same tax benefits offered to startups such as the ability to depreciate tangible and intangible assets, as well as, business entity formation choices.

• • Although there may be potential hidden challenges not disclosed or discovered in due diligence when acquiring a business, an established business typically has fewer risks compared to startups.  All startups must prove their business model is viable, establish effective operating procedures, and successfully face an uncertain market reception when they launch.  

On the other hand, if your intent is to own a business that has the potential for exponential growth and disruptive innovation, you may want to stick with launching a startup instead of acquiring an established business.  You’ll need to find capital from a non-banking source or be willing to bootstrap your startup’s cash flow if you choose to start your own business.

Ultimately, the decision to launch a startup or buy an existing business depends on your personal goals, skills set, risk tolerance, and access to capital.  Both options have their merits.  If your choice aligns with your strengths and aspirations, you’re much more likely to succeed.