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Going Into Business—New vs Used?

Why do the majority of new businesses fail within the first 3 years? Look at the reasons why an existing business may offer a better path for investing your money!

Many people dream of starting their own business, beginning from nothing and developing their own ideas, building a company from the ground-up into a great, prosperous, business. What they often don't think about is all of the complex tasks that need to be completed and the time (in years) that it takes to complete these tasks. With this in mind, it is no wonder that a significant number of new businesses fail within the first 1-3 years of starting out.

Buying an existing business can often significantly reduce the risks of business failure compared to starting out from scratch. Let's compare the Top Seven Reasons Why Small Business Fail (by Patricia Schaefer in Business Know-How) in a Start-Up and in an Existing Company.

#1 Wrong Reason: Starting the Business for more money, more time, more autonomy! A Start-Up will consume money, consume time and will be the boss until it becomes a self-sufficient business. An Existing business should already be generating cash flow and profits, have an operating structure with employees to allow you time, and should have an hierarchy to provide you with a level of autonomy.

#2 Poor Management: Lack of necessary business skills. In a Start-Up owners do not always have a complete set of the necessary business skills to be successful, and due to the lack of time often ignore developing the ones they do not have. In an Existing business processes have already been established for each key skill area, allowing business owners time to develop key skills.

#3 Insufficient Capital: Lack of funds to keep the business going. In a Start-Up owners often fail because of insufficient operating capital (working capital). Bankers and investors generally feel more comfortable dealing with an Existing business that already has a proven track record.

#4 Location, Location Location: Picking a good location takes analysis and establishing a traffic pattern takes time. A Start-Up has the advantage of picking a new, better location that sometimes can be extra cost for an Existing business, however it may take a long time to change people's traffic patterns. An Existing business has a known location with a customer routine (habit), and habits are hard to break.

#5 Planning: Most start-ups lack a detailed business plan. A Start-Up requires careful, methodical planning; where many owners start without this, planning to get to the detail along the way, their time for detail is consumed and planning by 'seat-of-the-pants' results. In an Existing business a successful formula, via written or ad hoc procedures, systems and policies, for running the business has already been put in place.

#6 Overexpansion: Start-Ups often misunderstand the start-up growth. Start-up businesses often misunderstand their initial growth curve and do not properly project the inevitable plateau of demand, expanding too early and overburdening themselves with debt. In an Existing business the market demands should be stable to allow you to perform good market analysis.

#7 No Website: Simply put, if you are in business today you need a website. The cost of a good website with e-commerce capability and social media connectivity takes capital and time to build a loyal customer base (traffic) for a Start-Up. In an Existing business you are buying a proven website and the time that has passed to build traffic to the site, although not all Existing businesses have embraced the web.

The Right Choice, buying the perfect business, starts with choosing the right type of business for you. Looking at an industry with which you are familiar with, which you understand, and which most of all you can be passionate about. If you cannot show passion about your product and service, how can you sell your customers!       

This post is contributed by a community member. The views expressed in this blog are those of the author and do not necessarily reflect those of Patch Media Corporation. Everyone is welcome to submit a post to Patch. If you'd like to post a blog, go here to get started.

Alan Moore, MS, CFP® September 24, 2012 at 09:11 PM
Keep in mind that buying a business can cost significantly more than starting a business. This of course depends on the industry/profession. Also, some people get a psychological benefit from creating something out of nothing. This is a significant driver for some of us. I appreciate the reasons to buy a business. Maybe the next post can be why you should start your own?

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