The pros and cons of your business purchase options
When you're thinking about going into business for yourself, there are usually two main choices ahead of you. You can either choose to start your business from scratch – developing your own idea and building from the ground up – or buy an existing business.
But how do you decide which is the best way to go for your individual situation?
In this news post, the MDL Business Law team look at the pros and cons both of buying an existing operation, and of starting your own business.
The pros of buying an existing business
It can be a lower risk decision
Because you’re purchasing a business that’s already established – with an existing client base (if you’re selling a service) or an existing location (in the case of a retail store) – you have a solid base to build on. That means there can be fewer question marks than if you start totally from the ground up.
You usually won’t be liable for GST on your business purchase
If the business vendor sells you all the things that are necessary to the continued operation of the enterprise, no GST will apply to the sale – so you won’t need to budget for potentially thousands of dollars out of your nascent cash flow.
You have an existing track record and history to assess
Naturally, one of the big attractions of buying a going concern is that you know what you are getting into. You’ll be able to get a pretty good idea of the market and whether the business idea can be commercially successful – unlike a brand new business, where there are many more unknowns.
The cons of buying an existing business
Transfer duty is payable when you buy a going concern
When you’re buying an existing business in Queensland, you’ll be liable for transfer duty on your purchase. That’s not the case if you decide to start your own business.
Does the business rely heavily on key employees?
When a business is up and running successfully, it’s likely that their team of employees will have a big part to play. So if you can see a reliance on key employees, it might pay to consider putting in place an employment or service agreement with them, to ensure a seamless transition as you take over.
It’s important to conduct your own searches
When you’re thinking about buying a business, it’s important to go in with your eyes open, and gather as much information possible. One way to do this is by conducting relevant searches on the business.
For example, if the business relies on passing traffic and there’s a bypass about to be built (that will reduce the passing traffic), you clearly need to know before you commit. A relevant search can give you this information.
One of the most important searches to consider is the PPSR (Personal Property Securities Register), which can tell you if the business’s valuable vehicles, equipment, and machinery are debt-free and safe from repossession.
Remember, there is always risk in business
Of course, there are no guarantees in business. And because you’ll be outlaying more for an existing business in terms of paying for lawyers, accountants, and all the searches you need, that means you’ll be staking more of your hard-earned cash on the business’s earning potential.
The pros of starting your own business
It can be a lower cost to get started
Starting your own business means you’ll be creating your own goodwill – you won’t be purchasing someone else’s.
And when starting your own business, you set the pace. You can start out small and test the market, before going in ‘boots and all’ and investing more heavily.
You won’t be buying anyone else’s problems
As a new business, your venture won’t have any problems or “skeletons in the closet” as may be the case with an existing business.
There’s no transfer duty to pay
If you decide to start your own business, clearly there won’t be a transfer duty payable, as is the case when you acquire a going concern. This can be a substantial potential saving in the early days of your enterprise.
The cons of starting your own business
It’s a tough road – and many new businesses fail
Of course, starting a new business any time is a difficult feat to pull off successfully. It’s estimated that one in three new small businesses in Australia fail in their first year of operation, two out of four by the end of the second year, and three out of four by the fifth year.
With the help of a clear business plan, your new business does have the opportunity to beat the odds. But it’s important to take a realistic view of your chances of success.
You might be waiting a long time before you turn a profit
As a new business with no existing customers, goodwill, or recognised brand, it’s very likely that it will be a long time before you operate profitably – even if you have almost zero expenses.
This lack of positive cash flow can make growing your new business more difficult.
You’ll have no established systems and processes in place
When you’re starting a business from scratch, you may well find you don’t know precisely how to handle all the situations you’ll be regularly faced with. And having started the business yourself, you won’t have a ‘handbook’ of processes and systems to refer to.
That means you’ll have to figure out everything as you go – with the inevitable missteps and costly mistakes along the way.
You’ll probably be competing against established competitors
Unless you’re pioneering a brand new product or service, it’s likely your new business will be up against more established competitors who have more resources and buying power than you do – at least to begin with.
Choosing the right business structure is important
Even though you can change your business structure when necessary, there may be quite a substantial cost involved.
For example, if you start your business as a partnership, and then wish to change to a company as your business grows, you may be charged significant Transfer Duty – and in some cases, Capital Gains Tax.
That’s why it’s worthwhile selecting a structure that will suit your needs both now and in the future.
Need advice on buying a business? Talk to MDL
Whether you decide to start your own new business, or buy a going concern, having guidance from an experienced Business Lawyer can be invaluable.
Talk to MDL’s experienced Business Law team for straightforward advice about your options and the best way forward.
Contact MDL today on 3370 5100 or fill out the contact form here to get in touch.