Seventy per cent of all new businesses start from scratch, while 26 per cent are purchasers of existing businesses. The remaining 4 per cent are businesses that have either been inherited from a family member, restarted from a previously failed business, or bought by the employees from the owners.
Sometimes conditions are more favourable for starting a new business than for buying an existing operation, for example:
· When a person has created something unique and starts a business to market their innovation or invention
· When a person recognizes a gap in the market where it is clear that customers’ needs are not satisfied by existing businesses
· When the market has grown and existing businesses cannot supply all customers
If these conditions do not exist, then starting from scratch could be more difficult because existing SME’s will provide considerable competition.
1. Setting up a new business – starting from scratch.
Why would you start a business from scratch (nothing)?
- Freedom in establishing the firm.
- The owner is responsible for its growth
- No expense of paying for goodwill.
- Start small and grow
- Owner choose your own staff
- Owner set up their own standards and practices
- Owner doesn’t inherit anyone’s business problems
- High risks
- Uncertain future
- Hard to obtain finance
- Takes time to establish customers
- There is no trading reputation
- Takes time to find loyal staff
- Profits may take time due to the high start up costs
- No established relationship with suppliers or distribution
2. Buying an Existing Business
What does it mean to buy an existing business?
When an existing business is purchased, the business is already operating and everything associated with the business is included in the purchase – for example:
· Stock and equipment
· Existing customer base
· Reputation and goodwill
When purchasing an existing business, it is essential for the potential purchasers to know why the business is for sale. If the business has been struggling, it may not be a very good purchase. It is also important to examine detailed accounts for at least the previous three years to determine the financial health of the business. The true value of goodwill is one aspect of the financial statements that is often hard to estimate. The seller of the business may overestimate the value of the business’s reputation; therefore consultation with an accountant is important to confirm the accuracy of the value placed on goodwill by the seller.
· Existing customers
· A good reputation= a good chance of success
· Easier to obtain finance
· Existing inventory
· Seller sometimes trains the new buyer
· Equipment is in situ
· Employees can assist the new owner
· Immediate income flow
· Hard to change the existing reputation of the business,...