Starting a Business vs Buying a Business
If you're thinking about owning your own business, you may have never thought about anything other than starting from scratch. Or you may feel like buying an existing business is cheating or out of reach. But the reality is that either option could be right depending on your needs.
For a small cash outlay, starting from scratch almost always wins. You can start in your garage and bootstrap as sales come in.
When you buy a business, you're not only paying for any existing business property but for the value of its future profits as well.
Even though buying a business costs more, getting financing to buy will almost always be easier. Banks want to see an existing business with strong cash flows before they make a business loan.
If you're trying to start from scratch, you'll only be able to borrow based on your personal credit.
An existing customer base is also a pro for buying a business. When you're starting from nothing, you can never really be sure whether they'll come if you build it. A business with an existing customer base means nearly guaranteed sales.
The key is to ensure that the customer base consists of repeat and loyal customers. A large number of one-time customers may be a sign that the business model is unsustainable and that you won't have recurring revenue unless you continue to acquire new customers at the same rate.
You also want to make sure that the customers are loyal to the business's products or overall reputation. If the only differentiating factor is the previous owner, customers may shop around after the transition meaning that the customer base isn't worth as much.
Tax treatment favors starting a business early on but may favor buying when you sell. When you start a small business from scratch, you can use Section 179 and other deductions to immediately write off most of your business expenses.
When you buy a business, that cash outflow is not tax-deductible because it's considered a capital investment just like buying shares of stock of a publicly traded company. The tax break comes when you sell and can subtract your initial investment from the selling price when calculating your capital gains tax.
While starting a business carries risk, you know exactly what you're getting. That may not be the case if you buy.
The owner may be selling because of problems with customers or key suppliers that aren't apparent in their financial statements. Just like with buying a home, you can do due diligence, but you won't know everything about the home until you've lived there for a few years.
When it comes to putting money back in your bank, buying will almost always win. An established business with healthy profits allows you to immediately start taking a reasonable draw. When starting from scratch, it could be months before you see any revenue and years before you can pay yourself without any worry about whether you're reinvesting enough to continue your growth.
While the ultimate decision comes down to a judgment call, we can help you understand the numbers. Contact us to learn more about our forecasting, budgeting, and other business planning services.