Your new business: Start from scratch or buy ready-made
By ATB Financial 1 September 2020 3 min read
Maybe you have a passion that’s gone beyond a hobby into something that brings in cash. Or maybe you’re driven to run the show. The bottom line is you want to take the next step and launch your own business.
But where to start? From scratch, with a brand-new shop? Or buying one that’s already established? Both have their pros and cons: read on to find out which option might suit you best.
Considerations for starting a business from scratch
If demand for your products or services (fabulous sales at the farmers market, new yoga students, increased online subscriptions) is strong but you want to minimize debt, starting from scratch could be for you.
- Pros: By starting from the ground up, you are able to define the business under your own vision. Your costs going in also are less than buying an existing enterprise and everything that goes with it, which means you can usually finance your venture personally before going to the bank.
- Cons: You don’t have the volume of sales to confirm market demand. So, any money you invest in starting up is at risk.
Having a concept is good. To make it a reality, you also need to know how financially viable your idea is as a business. And how much you need to invest or borrow to make it so, with as little outside capital as possible.
Keep it realistic
Determine how big you want to go as a start up and how much it will cost to make and sustain a profit. A business plan (the strategy) and business model (the action) will help you nail down key issues, including market research to show if there is public interest.
Be realistic: do you have the sales now to pay the costs of running your own business? The information from your business plan and model might show you can’t start as big as you want because you don’t have the income.
As for debt, the general rule is to follow the 3-to-1 ratio: three-parts debt (bank loans, etc.) to one-part personal investment. This is important because the less debt you have, the more flexibility you have to change up and do new things.
Considerations for buying a business
You’ve seen the “For Sale” sign and like the idea of buying an established business. The benefit of taking this route is everything already is in place for you to step in and start making a profit.
Or is it?
- Pros: Under the right scenario you will get a ready clientele, profits, employees, equipment and market space right away.
- Cons: All that good will comes at a premium.
Often sales are built on relationships. If the previous owner was the draw, you might face a vacuum when they leave. Conversely, you might want to include a non-compete clause as part of the purchase agreement, so they don’t open shop down the block.
Keep it realistic
Do your due diligence to know whether the asking price is worth it. Have your (experienced) accountant and lawyer review the business’ income and financial statements, customer lists, sales forecasts, and supplier agreements to understand what clients and sales will actually transfer over to you. Dig into how much goodwill you’re paying for and if it is a fair amount.
And while real estate can be a good investment, your money is better used to build up your business in the beginning, instead of tying it up in mortgage payments. Have a steady, sustainable cash flow before buying the building.
New or used checklist
You have a great idea for a business; you also have the passion, expertise and some money to go the next level. Here’s a quick checklist to boost your way up the success ladder:
- Have your advisors lined up: your lawyer, accountant, banker - people you feel you can talk to about financing, your options and how to obtain them.
- Have a business plan and business model, and a forecast. Download ATB’s Entrepreneur’s Guide to starting a business for help with that.
- Understand the costs of starting your business and the short and long-term implications. Know what your capital structure is going to be and how you are going to set up the business from a financial perspective.
- Educate yourself on the resources out there – ATB Entrepreneur Centres (Calgary, Edmonton, Lethbridge and Grande Prairie) and Business Link in Edmonton and Calgary, both have experienced professionals offering their expertise and guidance.