Introduction
A deep insight is a fundamental prerequisite to starting and successfully operating any business, no matter the industry. Entrepreneurs succeed by leveraging unequaled business knowledge and skills in their preferred ventures. The success of a new business in the long term largely depends on the knowledge the owner has concerning factors affecting it. Similarly, existing businesses continue to experience evolving challenges such as; new competition, industry dynamics, market changes, and new regulations that bound their operation (Jaco, 2020). Upcoming investors need professional analytical guidance before investing in their venture to ensure the business achieves optimal potential within the envisioned period. Starting or acquiring an existing business calls for an informed business plan guided by industry analysis, market research, and financial projection (Lindzon, 2022). It is the business plan that steers business growth by aiding the entrepreneur to make the right decisions on aspects affecting the business. One of the key initial decisions an entrepreneur has to make is how to get into the industry, either by purchasing a developed business or starting up a new one. This report incorporates intensive business research to advise Sam Hill, a young Food Tech entrepreneur, on whether to purchase an existing business or start a new one.
Background
Sam Hill is a 24-year old American business enthusiast motivated to start his entrepreneurship by owning a Food Tech business. Sam has settled on investing in food technology without experience, citing the recent rapid growth in the industry. Many people are currently struggling to maintain a balance between hectic working schedules and personal lives. Moreover, the current pandemic has fuelled a health revolution at a personal level as most people are conscious about their health and wellbeing. These circumstances have created instantaneous high demand for Food Tech services, which Sam intends to capitalize on (Gahlaut, 2020). His main objective is to contribute to the revolution of the food industry by availing healthier and more sustainable alternative products to customers. Sam has strategized to leverage advanced technologies such as a QR code-based menu, a more efficient contactless method of payment, online personalization of meals, process long-expiration date foods, and a system for tracking food sources and ingredients for safety (Gahlaut, 2020). He aims for a multinational company in a few years, setting the bar for the company to have at least 50 employees and serve 200,000 clients by the first year. The preferred start-up location for the business is in Chicago, Illinois, and later to start physical stores later on in Seattle, Los Angeles, Tel Avil, and London. He intends to rely on the internet to promote the business and attract more prospects globally. Sam has to prepare for stiff competition from established Food Tech companies such as CookMyGrub, DoorDash, and Delivery Hero, although their models are not completely similar. To succeed in this venture Sam has to make informed decisions, starting with whether to purchase an established business or start his afresh.
Factors to Consider
Before making the decision, Sam has to consider some factors that he can use to gauge the pros and cons of both options. The following are some of the key factors to consider:
Start-up Costs
The start-up cost is one of the most important factors to consider while starting a new business. Sam should first consider the start-up costs involved in both choices to create a budget that will comfortably acquire and run the businesses. The lower the start-up costs the better.
Business Idea/Plan
A business person cannot start a business without an inclusive idea of the business they want to venture in. The businesses idea develops a business plan that describes the business, business environments, marketing strategy, and budget. A business plan equips an entrepreneur with adequate knowledge and expertise to run the business successfully.
Market
It is also necessary to consider the availability of the market the business can serve and demand its services. Sam should consider the current market size, its potential, possible market share, and market segmentation (IET, 2021).
Capital and Finance
All businesses require capital and funding to operate. Having considered a target market, an entrepreneur has to consider the total amount of capital and finances required and strategize ways of attaining the figure. The financial sources can be personal savings, donations, support from family and friends, or borrowing.
Competition
A business cannot prosper in the industry unless the management knows who they are up against, what they are doing, who/where they serve, and how to supersede them (IET, 2021). Researching the business’s competitors will enable Sam to differentiate his business processes, products, and services to stand out.
Staff
Staff members are great determiners of the success or failure of a business because they are the entrepreneur’s foot soldiers. Efficient staffing and manpower do not only improve performance, but it also saves on the cost of replacing staff regularly. The business owner has to devise a proper recruitment strategy to hire self-driven and motivated employees.
Purchasing an Existing Small Business
Advantages
- The groundwork to start the business up and operating will already have been done. An established business has a planned financial system, investments, and precise book of records. The business will also already have established and promoted its brand, which brings with it the company’s reputation. (PW, 2020). Purchasing an existing company saves the entrepreneur the hassle of formulating and executing a fresh business idea.
- Easier to finance. An existing business is much easier to finance as compared to a startup. Financiers hesitate to fund new ventures due to the likelihood of failure. Though existing businesses require less funding than start-ups, existing ones have already built investors’ trust to provide financial aid whenever necessary. Moreover, an existing business has many assets including equipment and land, which it can leverage to borrow loans from financial institutions.
- Established market and customers. unlike a start-up where the entrepreneur has to start claiming their market share afresh, an existing business has already established its market share. Besides, before purchasing a business the buyer will know the market’s reaction to the business (FFBL, 2022). Most start-ups begin with a few or no customers to serve, which implies slow income generation. When an entrepreneur purchases an established business, however, they inherit loyal customers assuring a higher flow of income within a short period after taking over.
- Existing workforce and equipment. A substantial amount of start-up’s budgets goes to staffing and equipping the business to foster operations. An existing business has established resources including manpower, equipment, and non-physical resources like connections. If the company in question has sufficient resources and a motivated workforce, the buyer will not have to repeat the recruiting exercise or purchase new equipment.
- Short start-up time. Existing businesses take a much shorter time to start up than start-ups. Since the previous owner has already laid the groundwork, the buyer might just have to make a few managerial changes to get the business running. In most instances, the auctioned business does not even have to suspend its operations as the management changes.
- Smooth operation. Businesses face enormous challenges during their start-up stage, with a possibility of failing. Purchasing an existing business is preferable because its management overcame these challenges and stabilized the company’s operations. When the new owner comes in they take over a smooth operating business.
Disadvantages
- More capital intensive. Established businesses are extremely expensive and require a high upfront initial investment. Profitable businesses are expensive because the business owner has invested enormous resources to raise it to that point. The initial investment in purchasing an established business is substantially higher than the cost of starting a new business (PW, 2020). This alone makes purchasing business a poor decision for most upcoming investors.
- Risk of scam. In addition to the high cost of acquisition, a new entrepreneur may fall into the traps of unscrupulous sellers. For instance, the previous owner might misinterpret financial data, gloss over needed repairs, or fail to present business operations entirely. Such occurrences disadvantage the buyer financially and ambition-wise. Legal counsel is necessary when reviewing the business’s legal documents.
- Bad reputation. Existing businesses might also have bad reputations that could ruin their progress in no time (Wilson, 2021). A bad reputation may arise from Public Relations (PR) issues for mistakes such as poor customer service, legal troubles, and Corporate Social Responsibilities (CSR) (FFBL, 2022). Such a reputation could flop the company’s sales damaging the entrepreneur’s career.
- Outstanding contracts. The previous owner might have left outstanding contracts that the new owner may need to honor or renegotiate. Such contracts would be long-term and no longer beneficial to the business making them long-term liabilities. Do not forget that these contracts might cost the business huge sums of money and resources, and failure to honor them could result in a legal tussle.
- Staff may be underperforming. The business in question could also bear inconspicuous performance issues that lag its efficiency. For example, the employees may have low morale, lack coordination, and an unhealthy working environment that undermines their input (NIBI, 2021). The company’s equipment might also be obsolete, calling for expensive repairs and replacements.
- External business factors. Several external factors could negate the future growth of the business in question. These factors may include unprecedented and, in some cases, unmanageable shifts in the industry, the economy, or globally. A proactive entrepreneur can address challenges like increased competition, technological changes, and environmental issues. Even so, some external factors like policies and economic recessions could lead to massive losses.
- Reason for selling: No investor would decide to sell their long-term investment without an apparent reason. The problem is that the previous business owner might lie to conceal the reason if it is unpleasant to the buyer. For instance, the business owner might have neglected the company and they are finding it hard to resuscitate it. Purchasing a neglected business would lead to further expenses, despite spending ludicrously on capital, with the uncertainty of the business’s future.
- Might be challenging to make it “your” business. An purchased company may take a long time and resources to associate with a new owner. “When an entrepreneur purchases an existing business they are stepping into someone else’s vision (FFBL, 2022).” To be associated with the identity and reputation of a purchased business the buyer has to make some changes. These may include; introducing new products and services, changing the décor/appearance, rebranding, and revising the operational structure (FFBL, 2022). These would require a lot of time and money, and the new owner may never feel in full possession of the business.
Starting a New Business
Advantages
- Lower capital requirement. One of the main advantages that evokes preference of start-ups over established businesses is the comparatively low capital requirement. The low costs are attributable to the fact that a new business does not have many responsibilities. For instance, the entrepreneur can start in a relatively smaller physical space (housing), with a few employees, equipment, and a small operating capital (Weedmark, 2020). This is because the business will be aiming to serve a small section of the market with a limited variety of products and services. As such, an upcoming entrepreneur can do not have to take big loans from lending organizations if they have secured some savings.
- Maximum flexibility. most people desire and opt to be independent entrepreneurs mainly because they want the freedom and flexibility it offers. A 2021 survey on the reasons why most youths are opting for entrepreneurship revealed that the most common perks were the flexibility to work around kids’ schedules, university classes, and personal preferences (Zen, 2022). Starting an afresh business gives the entrepreneur the flexibility to engage in other activities, including investing in other ventures.
- Being one’s boss. When a business person starts their own company from scratch they become self-employed. Purchasing an existing company implies that the buyer has to take over the consequences of the previous owner’s past decisions. A start-up business owner has the final say in all the decisions affecting the business, which implies they are in a position to control the venture fully (Williams, 2020). Moreover, being one’s boss facilitates an independent lifestyle that everyone craves.
- Personal satisfaction and growth. Entrepreneurs prefer to launch businesses to protect and enjoy their interests as a source of income. That is why entrepreneurs start businesses based on their passions, gifts, and talents. The entire process of manifesting, preparing, implementing, and witnessing an idea grow into a renowned business organization brings a sense of personal fulfillment.
- Develops personal brand: Start-ups are grounded on the interests and preferences of the owner. The business owner introduces a uniquely personal touch through differentiated products and services. Startups also enable business owners to understand their customers’ needs and establish lasting relationships that build trust and loyalty. These merits help the entrepreneur to build a personal brand that will promote any business activity they relate with.
- Personalized work environment: In a startup, the entrepreneur cultivates the most desirable work environment. Unlike in an existing business where the new owner has to start amending the existing work environment, in a startup, the entrepreneur develops a personalized one. This lays the foundation for an enabling organizational culture incorporating desired values like diversity, integrity, teamwork, and employees’ self-drive that boost efficiency.
- Versatility: Start-up businesses are highly versatile, they support a variety of skills among employees. Unlike in a corporate job, the entrepreneur and employees of a startup can perform multiple roles, for instance, the manager can double as a salesperson. Versatility opens doors to diverse opportunities that can expand the business quickly.
- No pushback from established customers: In a new business venture the business owner does not experience pushbacks from employees. Employees in an existing business may resist changes creating conflicts. Also, the entrepreneur does not inherit delinquent customers.
Disadvantages
- Financial risk: Starting a new business puts more entrepreneurs in complicated financial situations than buying existing businesses. For instance, many business owners take loans to start the business leaving them with little or no resources for risk management. This exposes them to financial risks such as defaulting on loans, accumulation of debt and delay in delivering services (Bhakuni, 2022). Also, new entrepreneurs stand financial risks from external events like natural disasters or health crises.
- More commitment: Being one’s boss means that there is no one with authority over the business owner. The entrepreneur is responsible for setting the business’s direction, goals, and objectives, establishing opportunities, and mentoring the employees. To accommodate the roles of a startup requires more commitment than taking over an already established business.
- Lack of expert guidance: In many cases, upcoming entrepreneurs start businesses without expert counsel on the industry’s dynamics. Starting a business blindly could lead to losses that can stunt their entrepreneurial career.
- Lack of experience in the industry: Similarly, new entrepreneurs lack experience in running a business. Insufficient knowledge and experience in any career make it hard for newbies to catch up and outdo the professionals. Inexperience is better in existing businesses is less risky than in startups because they already have a stable system.
- Insecurity and self-doubt: While starting a business, an entrepreneur experiences endless challenges that may make them doubt their abilities. However, to be a successful entrepreneur one has to be unequally resilient and confident to achieve their goal.
Conclusions
In sum, both starting a new business and purchasing a new one have their merits and demerits. An upcoming entrepreneur may prefer purchasing an existing business because they are easier to finance, have laid the groundwork, operate smoothly, already have a workforce and equipment, and take shorter start-up time. Nonetheless, existing businesses require more capital, increase the risk of spam, may bear a bad reputation, may have outstanding contracts, and underperforming employees. Also, the previous business owner may fail to disclose the real reason for selling the business, the new owner may not feel like they entirely own the business, and they are vulnerable to unprecedented external factors like economic recessions. Contrastively, an entrepreneur may prefer a start-up because they are less capital intensive, flexible, more versatile, have no resistance from existing employees/clients, and help develop the entrepreneur’s brand. Start-ups also allow entrepreneurs to be their bosses, set desired work environment, and brings personal growth and satisfaction. The demerits of starting a new business include increased financial risk, more commitment, lack of expert guidance, insecurity (self-doubt), and often insufficient experience. To avoid the pit traps in both options, an entrepreneur must conduct sufficient business research and seek legal counsel throughout the process.
Recommendations
Based on the analysis above, it is recommendable for Sam Hill to start a new business than to purchase an existing one. Sam has no business currently, which implies that he does not have access to unlimited capital and he has little experience in the industry. Starting up a new business is recommendable because; Sam will not need large capital; he will be flexible and versatile, and his boss. He will also lay a fresh foundation of desired values and principles that will enhance efficiency. More importantly, a start-up will contribute more to developing a personal brand and be in control of its growth, which brings about personal fulfillment. If Sam opts to purchase an existing company, he will require to raise more capital, probably from borrowing, and will be exposed to risks like a ruined business reputation, heavy outstanding contracts, and underperforming employees. He would also risk scams, the seller’s ulterior motive, and external factors that can ruin the business. Note that it is highly recommendable for Sam to seek counsel from trustworthy investors in the Food Tech industry, and a registered lawyer every step of the way.
References
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