7 Guidelines for Choosing Between Buying a Business or Starting from Scratch

If you’ve read Entrepreneur Magazine you’ve no doubt seen the thousands of different franchise opportunities available to you: cruise planning, Jazzercise, home cleaning, hospitality, food trucks. But if you spend your free time reading Entrepreneur Magazine then you likely have a part of you that wants to start “the next big thing.” So, how do you decide between buying an already existing business and starting one from scratch?

Here are 7 guidelines for choosing between buying a business or starting from scratch.  Writing down your results from each guideline, and putting in the time planning before starting, will increase your likelihood of success. As the carpentry proverb goes, “measure twice cut once.” Likewise, in buying or starting your own business it is imperative that you take the time to plan beforehand. Once you’re committed to a business plan making changes are costly and increase your risk.

Guideline 1: Evaluate what you’re ready for

If you’ve been receiving a steady paycheck for years are you comfortable stepping away from the security? If not, buying into an already existing franchise may better suit you.  If, as you’ve been receiving that steady paycheck, you’ve been thinking about side businesses you could be starting then perhaps the better route for you is to start your own business.

One useful tool that will help you evaluate whether you’re a “Model Entrepreneur” is the Entrepreneurial Self Assessment Tool from the Salt Lake Small Business Development Center. Completing those few assessments will help you evaluate yourself as an entrepreneur: what you have energy for, where your values lie, what kind of pressures you can take on, etc.

Guideline 2: Evaluate what excites you

As any serial entrepreneur can attest, there is no such thing as “get rich quick.” A business, whether purchased or started from scratch, requires immense effort and an enthusiastic vision. Here are a few questions you can use to gauge your enthusiasm:

• If you’re thinking of buying a business does the product or service excite you? Does it excite you enough to put in the long hours requisite to successfully maneuver the ownership transitions?
• If you’re thinking of starting your own business does the product or service generate enough excitement in yourself to be able to then turn that excitement into a successful launch? Can you get others excited about your product or service?

Guideline 3: Schedule your day

Determining whether you’ll be more happy acquiring a business or starting from scratch depends, in large measure, how you’ll be spending your time each day. So, build out a sample day for each of the ventures you’re evaluating. For potential acquisitions or franchises ask a current owner/manager how they spend their day. Then build out a schedule that is at least 25% more crazy and haphazard than what they told you. If you’re looking to start a business think through all the tasks you’d be working on and lay that out on a daily calendar. Make sure you schedule sufficient time for the recurring events and then pencil in projects you expect to arise. Then pencil in 25% more time as unallocated since you likely cannot forecast a full picture of all the issues that will arise.

Which schedule do you think you’d be happier with? Which one will provide fulfillment?

Guideline 4: Do your research

If you’re thinking of buying a business interview other operators of similar businesses. Are they happy? Are they making money? Research the history of your business and any reviews or complaints they’ve received. Some places to look for those reviews and complaints are:

• Social media mentions or reviews (Google+, Facebook, Twitter, LinkedIn, GlassDoor).
• Google your potential purchase. For example, if you’re thinking of buying Fred’s Sushi Shop you’d Google “Fred’s Sushi Shop Reviews.”
• The Department of Commerce for the state where the business is operating. Most Departments of Commerce have a way to file and view complaints.
• The Better Business Bureau – take this with a grain of salt, knowing that businesses who pay for a BBB subscription are more able to manage negative reviews and thus the BBB is somewhat “pay for play.”

If you’re thinking of starting your own business are there any competitors you can evaluate? If there are competitors from different geographies they may not consider themselves a direct competitor (yet) and you may be able to talk with them and get a pulse on the industry, their levels of fulfillment, etc.

Related Article: Want to Be Profitable? Focus on the Customer Experience

Guideline 5: Ask a banker

Regardless of whether or not you’ll need to borrow money to get started, a potential lender can still help you evaluate whether your should buy a business or start a new one. While bankers at larger institutions often deal in a small segment of potential businesses and funding needs, there are bankers or alternative lenders that have diverse options and would be willing to talk with you to help you evaluate your idea from a “fundability” perspective. They can give you a unique perspective into whether a franchise/acquisition or a business idea is fundable or may be fundable in the future. Knowing where a lending institution is willing to put their money can help you know where you should put your time and money.  To find a lender you can ask a business associate for a trusted referral or you can

Guideline 6: Build a financial plan

When evaluating business opportunities you’ll see a slew of acquisition opportunities and franchises that you can start for a few thousand dollars. These same opportunities generally claim big and quick break evens. However, as the parable goes, “if it’s too good to be true it probably is.” As a rule, the less expensive opportunities will take more work and provide less stability. With that in mind, is it worth the upfront investment or could you do the same thing on your own?

Another big financial consideration when choosing between buying a business and starting your own is how long you can operate on your current savings? If you’re buying a franchise with an already established brand your upfront investment is going to be greater but the likelihood of making a livable wage is greater.

One benefit of starting your own thing is that you can often maintain your current income and start the business on the side, waking up early and staying up late to operate your startup.

No matter the route you go, you need to build out a financial plan and take into consideration what it will cost you to start or acquire your business, what it will take to operate your business, and then how long your savings will take you.

Related Article: The Secret to Small Business Financing Success

Guideline 7: Go with an MVP

The term minimum viable product (MVP) is a strategy of quickly taking a product or service to market and testing how it is received and whether it can make money before putting the full development into it to create a near perfect product. The idea of using an MVP to start your business was popularized by Eric Ries in The Lean Startup.

If you’re thinking of buying a business can you treat the opportunity as an MVP and take a test shot at it? Can you make a staggered purchase based on the business hitting certain performance benchmarks?  If you’re thinking of starting your own business what is the MVP that you can take to market?

When choosing between buying a business and starting a business from scratch you should closely evaluate the potential for an MVP. Whichever option allows you to try a minimum viable product out on the market, before going full in, likely decreases your risk and increases your potential for success.