7 Pros (and 1 Con) of Buying an Existing Business

Many aspiring entrepreneurs we work with ask ‘what are the advantages of buying an existing business, versus starting a new one from scratch’. It’s a great question, and one that has a number of aspects to consider, including existing customers, existing employees, company culture, and of course the bricks and mortar of the established business itself.

The reality is that buying an established business has a number of advantages over starting a new one, but it has one big downside as well. 

Let’s look at 7 pros and 1 con of buying an existing business with a focus on the Australian market.

The 7 advantages of buying an existing business

1. Proven Track Record

When you buy an existing business you’re buying a proven concept. While startups can struggle to get traction early on, existing businesses have already proven themselves in the market and have stable cash flow.

According to a recent report by the Australian Bureau of Statistics, only 60% of new businesses survive beyond 3 years. Existing businesses with a history of profit have a more solid foundation for success.

2. Established Customer Base

Another big advantage of buying an existing business is inheriting the existing customer base from the previous owner. Building a customer base from scratch can take time and money.

A 2023 Deloitte Australia study found it costs 5 times more to acquire a new customer than to retain an existing one. With an existing business you’re buying instant access to a customer pool who already know and trust the brand.

3. Existing Brand Recognition

Brand recognition is a valuable asset that takes years to build. When you buy an existing business you’re also buying its reputation and market position.

The BrandAsset® Valuator, a leading brand equity model, suggests strong brands can command a 20% price premium over their competitors. This existing brand equity can give you a big marketing and bottom line boost.

4. Immediate Cash Flow

Starting a new business requires a big investment before you see any returns. Buying an existing business means stepping into a business that’s already generating revenue from loyal customers. The Australian Small Business and Family Enterprise Ombudsman says cash flow issues are responsible for 90% of small business failures. By buying an existing business with a steady revenue stream you can reduce this risk and focus on growth, not survival. This can be especially important where stock or inventory is required as an upfront investment, for example where a commercial retail loan is taken out by an owner and their is increased risk that repayments can’t be met.

5. Existing Processes and Systems

Existing businesses come with tried and tested operational processes and systems which are essential to business success. These can include everything from supply chain management to customer relationship tools.

A MYOB survey found 44% of Australian small businesses struggle with operational inefficiencies in their first year. By buying an existing business you can bypass many of these growing pains, and benefit from refined processes that have been honed over time.

6. Trained Staff and Industry Relationships

When you buy an existing business you often inherit a team of trained staff and existing industry relationships.

The Australian HR Institute says it costs an average of $5,000 to hire a new employee not including training costs. With an existing business you get instant access to skilled staff who know the business and the operations. Plus you get existing relationships with suppliers, distributors and other industry partners.

7. Easier Financing

Not surprisingly, it’s often easier to get financing to buy an existing business than to start one. Banks and investors see existing businesses as less risky. The Australian Banking Association says loan approval rates for existing businesses are 15% higher than for startups.

With financial statements and proven cash flow you’re more likely to get good terms on business loans or attract investors.

The 1 Big Downside: Higher Upfront Cost

While the benefits are many it’s important to acknowledge the big downside of buying an existing business: the higher upfront cost. The purchase price of an existing business can be much higher than the initial investment required for a startup. This is because you’re not just buying assets you’re buying the business’s goodwill, customer base and future profit potential.

According to ASIC data the median price for small businesses sold in Australia in 2023 was $380,000. This can vary greatly depending on the industry, location and profitability of the business. You need to do your due diligence, create a business plan, develop your cash flow model, and get professional advice to make sure the asking price matches the true value of the business.

Comparison Side By Side Table:

Visit this page if you’d like a comprehensive ‘Buying an Existing Business Checklist‘ to make sure you don’t make any mistakes along the way.

Conclusion

While the upfront cost may be higher the benefits of buying an existing business often outweigh this for many entrepreneurs. From immediate cash flow to existing brand recognition the benefits can give you a solid base for future growth and success. But as with any big business decision you need to weigh the pros and cons, do your research and get professional advice before you buy.

Hopefully this article has made you better equipped to make an informed decision about whether buying an existing business is the right path for your entrepreneurial journey in Australia.

What now?

We’ve helped more than 3,300 business owners across Australia and New Zealand over the past 14 years. We specialise in business planning, cash flow modelling, and business finance brokering.

Let’s talk about the business you want to buy, or start, and see how we can help you too. Call 1300 262 098 to talk to an expert (free).