In our last blog we discussed the Top 7 Reasons for Buying an Existing Business Instead of Starting From Scratch. Today let us consider the other side of the coin, in a brief blog. What are the top reasons for you to start your business from scratch rather than buying an already existing business?
Let’s proceed now.
- A bad purchase that gives you regrets. Now, much as you should be in total control of the buying decision after doing a good due diligence, sometimes this simply does not happen and you end up having a very bad purchase that you realize much later. This might result from factors such as your lack of knowledge, bad and compromised advisers, over relying on people, intentionally misrepresented facts etc. What do you end up with in such cases? It could be very old assets that you need to replace soon in a costly manner, extremely terrible business image, seriously underperforming business, problematic staffing, very low staff morale, terribly poor business location and yet very costly to relocate, problematic lease agreement, obsolete inventory, etc. These problems could take ages to correct, and in the process you might wonder why you never started your business from scratch.
- Financial dimension. The financial aspects of buying an existing business could be another nightmare. As a starting point, the purchase normally requires huge initial cash investment, moreover sometimes with inflated value, inflated goodwill, and unknown tax consequences arising from the purchase. This is why it’s very advisable for an entrepreneur to use the services of experienced and capable due diligence experts before such a deal. You might realize after the purchases that you need to inject in huge investments to turn around the business, which was not in your plan in the first place. The financing structure of the new business might not be good, or well selected and structured. These imply that you may not get the benefits of the purchase for a long time. It will also take a long time to get positive cash flow. Cash flow challenges could have been simpler if you started your own business from scratch and progressed slowly at your pace. Do you understand this?
- Knowledge dimension. Buying a business where you are clueless of the industry, other operational dynamics and critical success factors, might be worse that starting a business in an industry you are comfortable with and knowledgeable about. Knowledge is very important, and if you are not familiar with something you might find yourself even getting advice from people who would be happy to see you fail. You might not even get the help you desire. You certainly need industry experience to be successful. You can’t assume you will continue to ride on previous success of the business simply because you have bought it. No way my dear entrepreneur! Take care, or else you become a laughing stock.
- Inability to make your mark and set your standards from day one. Buying an existing business instead of starting one might mean that you have to live with what you have inherited, even if you don’t like them, for a while before you can change. The purchased business certainly lacks your originality, creativity, innovation etc. It lacks your touch and your mark. The systems and processes including fixed assets are not what you could have put in place if it was your handwork. The mission and vision might not match with what is in your head and heart. The business culture may be far from your aspirations. Moreover, transforming all these may be challenging, and require time and money, including the buy-in from the people you work with. Come on Mr. Entrepreneur! Do you think this is nice? The effort required in changing all these might not be worth it. It might be much higher than the effort you needed to get your own start-up moving in the right direction from day one.
- Previous owner effects. Again, some businesses are so linked, associated with and related to the previous owner, that anything new may not strike sense in the environment including the industry and market. An example is personalized services such as medical, legal etc. Developing trust with the clients after takeover of the business might not be easy and certainly takes time. Staffs loyal to the old owners might not welcome your ideas as the new owner of the business, and yet they know the business more than you in most cases. You might be forced to depend on old guards for a while and this could make you very vulnerable until you level up. Goodwill that existed with the previous business may not last. The adverse effects of the previous owner might make buying a business not very appetizing. Of course you can change this over time but it’s not easy.
- Hidden problems that surface with time. Not everybody has integrity and don’t assume that the person selling the business to you is an angel that will speak the truth and nothing but the truth to you, before you conclude the deal. In some cases hidden issues regarding the business will spring up later. This could be even after three or more years, and you cannot sheepishly run back to the previous owner with a baggage that you want to offload to him or her. Most likely he will not entertain you for long. The rough ones might want to rearrange your face for disturbing their peace. Such hidden problems could be tax issues dating back to 5 – 7 years (as the law permits tax authorities revisiting them anyway). It might be some bad contracts and agreements signed and running for the next many years, which could have skipped your attention at the time of due diligence. You might not even discern the real reasons why the owner of the business is selling it. By the way, haven’t you found people lamenting of having been fleeced in a deal? It happens in reality on earth, so don’t take chances! Ok?
- Lack of fit with your strategic goals and objectives. My final reason why buying an already operating business might not be very palatable, is the fact that this operational business might not have strategic fit with what you like, or with your other businesses. Conflicting mission, vision, strategy etc. has resulted into catastrophic and costly failures of some big global companies. So what about you in your small business outfit? Do you think that those big corporations do not have eyes and people with brains like you? If you are buying this operating business to add to your current business, do you have what it takes to properly integrate the businesses? I leave the rest to you.
So, there are equally very strong and valid reasons why sometimes starting your business from scratch might be a better option compared to buying an already running business. The choice as to whether you should start from nothing, or buy an existing business, is one that needs care. Understand yourself and your goals and objectives, including your mission and vision. Understand your capabilities. Weigh the pros and cons before you proceed. If you can’t see, be humble enough for someone to guide you rather than walk ahead in stubbornness and knock yourself with many unknown obstacles on the way. Do you get this? My hands are clean! I have advised you.
Enjoy the new week!
The Wise Entrepreneur