If you’ve chosen to make a career working for yourself as an entrepreneur, you need to make your first important decision before you start – do you buy a business, or build one up from scratch? Both routes have their own pros and cons, so consider your choice carefully before you take the plunge. 

Advantages of buying an established business

• You gain an existing market and customer base, which means that you’re set up from the word go, instead of spending time and money attracting new clients.
• You also buy the existing assets of the business – physical assets like premises or equipment, or intangible assets like intellectual property – which add immediate value.
• Proper due diligence can reduce your risk of the business failing.  Access to the financial and operational history of the business – which you won’t have for a startup – lets you make a more informed decision.
• You can establish the business's real market value before making an offer. You can also investigate its brand reputation. A reputation for quality products and excellent service can take years to build with a brand you start from scratch.
• Beyond an existing customer base, an established business can also give you access to ongoing contracts and professional relationship with suppliers and collaborators. However, if you’re buying customer contracts as part of the business assets, make sure that these will not place the business at risk – for example, by making you too dependent on one client. 

Disadvantages of buying a business

• You need to raise the upfront capital to buy, which can be significant. You also need knowledge and skill to negotiate a good price.
• Due diligence expenses can be substantial, and may involve legal, financial and audit costs.
• Goodwill value – the value of intangible assets in an existing business, like brand value or customer loyalty – must also be factored into the cost, and it isn’t always easy to determine.
• If you take on a business with existing staff, your approach to company culture might be quite different and make cultural integration a challenge.
• You may also have to overcome resistance to innovation from employees who worked for the previous owner. If they are used to the business working in a certain way, you might find it difficult to get buy-in on new ideas, processes and technology.

Advantages of starting a business

• You need a lower initial investment. Unlike buying an existing business, you can start small and scale up gradually, especially in service-based or digital sectors.
• Lower operating costs – starting a new business can often be more cost-effective than buying one in the initial stages. You can tailor operations to demand, which reduces your financial risk. A good example would be starting a retail business as an online-only store, to build your brand and customer base before you consider a bricks-and-mortar outlet. 

• It’s easier to invest creativity and passion into a business idea that’s all your own. You can try out unique innovations, and your belief in the business can keep you going when you run into challenges.
• Instead of having to adopt the branding and procedures of an established business, you’re free to brand, operate, and market your startup in ways that align with your ideas and vision, according to the tastes of your target market. This often leads to stronger customer relationships.
• You can be more agile and flexible – a strength of a start-up business that makes them more adaptable to changing market conditions.
• You avoid legacy issues like the need to pay for inherited goodwill or brand value – and you don’t inherit a previous owner’s business problems.

Disadvantages of startups

• Brand recognition takes time to create. Without an existing clientele or recognised brand, building a market requires patience, persistence – and money.
• You can start with limited resources – most startups have little access to capital, skilled labour, or networks at first, which again take time and investment to develop.
• You need to advertise your business and attract customers. This will take significant marketing and sales efforts.
• Establishing a startup can be a fulltime commitment. The life of a founding entrepreneur can be lonely and stressful – you’ll have to do everything from customer service and marketing to stock and financial management. Long hours are often essential, which can have a serious impact on your personal and family life.

Buy vs build – a summary of the key differences

• Investment and costs
  The upfront cost of buying a business and the time you spend on due diligence are offset by the time and money needed to build up a client base if you’re starting from the ground up. But starting your own business offers flexibility in budgeting, financing, and growing at your own pace.
  
  
• Marketing and branding
  Established businesses have an existing customer base and brand presence, while startups need to spend time and money to build those essentials.

Whichever you choose, you need knowledge and planning to succeed. Ultimately, your decision may depend on your preferred ways of working and your individual ambitions.

This Nedbank-supported toolkit gives you the knowledge you need to plan your new business. Nedbank also offers guidance on small business accounts and banking services.