Buying vs. Building an Online Business: Which Is Safer?
Joining the world of online business is an enticing opportunity.
Your online business can be tailored to suit your ideal lifestyle, allowing you to work from anywhere in the world, and have more control over your income.
If you want to join the online business world, your options are to either start your own business from scratch or buy a business that is already established.
Both options have their merits, from the creative control of forming your own startup business to the reduced labor of purchasing an existing business. The vital question you need to ask yourself is,” Which has more risks: building or buying?”
The online business market can be volatile, meaning that there are inherent risks with both ventures. What sets the options apart is the ease with which business owners can mitigate the risks involved.
While new businesses face a lot of uncertainty, established businesses provide owners with a solid foundation to tackle problems from.
In this article, we’ll go through the difficulties and opportunities that both buying and building provide, and which option provides entrepreneurs with the biggest safety net.
We’ll also discuss how to buy an online business the right way, in case that’s the road you choose to go down.
Let’s get started.
Building a Business: The Risks and Opportunities Examined
Having sold over 1.7k online businesses, we’ve collected mountains of data about the benefits and hazards of buying and selling established businesses.
In order to properly examine the question of “Which has more risks: building or buying?”, we needed something to compare our data to. So, we pulled data from different industries about the failure and success rates of both traditional and startup businesses to provide a point of reference when comparing the pros and cons of building vs buying.
Your Risks When Starting a Business
If building a successful business was easy, everyone would do it.
A report compiled by Fundera shows that according to the US Bureau of Labor Statistics:
- 20% of small businesses fail in their first year
- 30% of them fail in year two
- 50% of these businesses fail in year five
A whopping 70% of small businesses fail by their 10th year in business.
As you can see, the failure rate increases quite significantly when you get to the fifth year. One of the common reasons for this is that many entrepreneurs underestimate the amount of capital needed to scale the business.
While starting a new business is fairly inexpensive, scaling it to the point where it actually becomes profitable often requires a heavy upfront investment as you’re sinking funds into product development and advertising before you’ve made any revenue.
These statistics illustrate the dangers of becoming complacent after enjoying initial success. If the pandemic has taught us anything, it’s that we should never underestimate the influence that external factors can have on your business.
Take the current supply chain crisis for example. Entrepreneurs who are quick thinking and flexible enough to pivot with this change in the industry can not only survive but thrive in the face of adversity.
Sadly, many entrepreneurs won’t have the foresight to plan for the coming supply chain interruptions and their businesses will likely take a large blow as a result.
Taking all of this into account, let’s take a closer look at the factors that contribute to startup failures.
Lacking Capital for Operations and Growth
A study conducted by CB Insights revealed that the top reason why startups fail is a lack of funding.
A business, depending on its life stage and its model, can be a financial hamster wheel – it requires most of the capital it generates to keep it moving. In the early stages, you’re often putting more into the business than you’re getting out.
This doesn’t leave you with much income or cash flow and doesn’t provide you with any extra capital to scale the business if you are operating in the red
Risk-taking can lead to critical failure
Looking through the categories in the study, many of the points of failure can be avoided or weathered by business owners who remain cautious and flexible.
It’s important for entrepreneurs to seize opportunities and diversify their business, but if the risks aren’t properly calculated beforehand, you could end up in the “pivot gone wrong’ category.
This can easily be avoided by not doing anything drastically risky, like pouring all of your profits into creating a new product without first testing the market, and conducting thorough market research and product testing.
Regulatory Challenges Can Sink Operations
Perhaps the biggest risk on the list is the regulatory/legal challenges. While the majority of the points of failure can be manipulated or controlled by the entrepreneur, regulatory changes are largely outside of your control.
The business industry is subject to a vast array of laws and regulations. There’s always the chance that a new law could render your business obsolete, or severely hinder your production, manufacturing, or sales processes.
Diversifying your business’ income streams could help mitigate the impact of a new law taking away your core business offering, but it could still have a devastating impact on your bottom line.
With all of these risks and unforeseen circumstances at play, it boils down to your perseverance and flexibility as a business owner, and the contingencies you put in place that will determine your startup success.
Your Opportunities When Starting a Business
If you’ve identified a huge gap in the market or thought up a genius new product or service, starting an online business could rocket you towards success. The hardest part is taking the plunge and actually starting the business. Here are some reasons why you should take that leap of faith:
Potential for Small Startup Investment
Buying an online business can cost you a hefty chunk of change, but starting one from scratch is relatively inexpensive. Entrepreneurs who are strapped for cash can start their own business for only a couple hundred dollars.
This is especially true for content sites as there’s no need for product development and testing, or shipping and storage fees.
You have the power to shape the business
Let’s take a moment to think of businesses as pieces of clay. An established business has been pre-molded, fired, and glazed into a set shape. As the new owner of the business, you may be able to slap a fresh coat of paint on it, but it’s extremely difficult to change the core identity of the business.
When starting a new business from scratch, you’re working with a fresh lump of clay. The power to shape and mold the business into whatever you want it to be lies firmly in your hands.
You have complete control over the business model, brand identity, what niches you operate in, and the overall growth trajectory of the business.
Control over your time and financial wellbeing
As an employee, you’re reliant on your employer to keep the business alive and secure your income. As a business owner, you have more control of your destiny, including things like your income, hours worked, and daily tasks.
While you may not be able to directly control shipping restrictions, Google algorithm updates, or how consumers react to your products, you can exert power over other contributing factors.
For example, as an eCommerce entrepreneur, you can prevent stock shortages by connecting with multiple suppliers in different locations, or diversifying your income by expanding into other business models.
Leveraging your existing skills
According to a recent study by Guidant Financial, 44% of small business owners are between the ages of 39 and 54.
Of the participants in the study, 25% of the entrepreneurs were motivated to start their own business because of frustration with their corporate job and the dream of a better life.
You don’t have to attend Harvard Business school or get an expensive MBA to know how to run a successful eCommerce business. The skills you’ve built up over the course of your career can be applied to your new venture.
Process engineers or logistics managers are perfectly suited to creating highly efficient eCommerce businesses. Many programmers and developers have gone on to build successful tech startups and SaaS businesses.
Buying a Business: The Risks and Opportunities Examined
The biggest risk you can take when buying an online business is not understanding the online business ecosystem or the business model you’re investing in.
With an established business, the wheels are already turning. There’s often very limited time for you to sit back and learn the nuances of the industry before you need to jump and steer the business to safety.
The biggest risk is also the most valuable opportunity. Established businesses are already up and running, and have gained traction. The hard part has often already been done for you.
Your Risks When Buying a Business
Deploying a Large Chunk of Capital
Getting a new online business off the ground doesn’t cost much, so if it crashes and burns, you probably won’t lose too much money. Buying an established online business that will provide you with a decent alternative income stream, however, takes more than just pocket change.
One of the biggest fears that plays on buyers’ minds when purchasing an online business is the risk of losing their initial investment, their hard-earned savings.
While there will always be unforeseen circumstances outside of your control, the risk of losing large sums of capital can be largely mitigated by performing your due diligence.
Know your skills and weaknesses and apply them to a business that suits your particular skill set when you go to buy.
Buying a Safe Asset
There are, unfortunately, many scam artists who lie in wait on some marketplaces and private deals for naive or inexperienced buyers.
If you’re not careful, you could be sold a dud business with inflated numbers that don’t accurately reflect the true profits. Another nasty trick is for sellers to sell you a site that they are directly competing with, using your capital to grow their competing site.
Even sellers with good intentions can unintentionally upsell an underperforming site because they don’t understand their business well enough.
Luckily, this is an easy risk to avoid. Performing safety checks and using a trusted broker like Empire Flippers, will enable you to mitigate this risk and avoid bad acquisitions.
Threats to Growth and Initial Investment
We conducted separate ROI case studies on a variety of business models, bought from the Empire Flippers marketplace, to identify the success rates and critical points of failure for each business model. Here’s what we discovered:
For buyers of content sites from our marketplace, 47% increased their profits, 36% of the businesses experienced decreased profits, and 17% had no growth or decline after buying the business from our marketplace.
The biggest cause of failure among content sites was a lack of revenue diversity, with buyers instead focusing solely on adding new content to the site. Furthermore, 54% of content site acquirers identified Google algorithm updates as a major pain point.
Amazon FBA Businesses
For Amazon FBA buyers, 55% of the FBA businesses grew, 29% of them declined, and 16% had no growth or decline.
Of the Amazon FBA businesses that we surveyed, the biggest obstacles included a rise in competition, supply chain issues and stock shortages, and a decline in traffic to the buyers’ Amazon stores.
Lesser-known business models
The third study was conducted on lesser-known business models, namely SaaS businesses. It’s important to note the data for this study was collected during the pandemic.
Of the SaaS buyers who contributed data, 39% of their businesses experienced growth before and after the pandemic, 18% declined during the pandemic, 39% of the businesses experienced decline before and after the pandemic, and 4% were in a decline but then grew during the pandemic.
SaaS owners reported back-end development issues and customer payment processing problems as their biggest downfalls.
These failure points shouldn’t be cause for alarm, consider them a heads up of what to expect and avoid when buying. There’s so much potential on the other side of a new acquisition, so let’s break down what that opportunity looks like
Your Opportunities When Buying a Business
To put it bluntly, buying an established business allows you to skip the grunt work that comes with getting a business off the ground. Most existing businesses already have all the fundamentals in place, meaning they don’t require as much micro-management to remain stable. Here are some of the top benefits of opting for an established business:
Securing a Stable, Cash Flowing Asset
When building an FBA or eCommerce business from scratch, you require a lot of capital for inventory and infrastructure setup. This means that in the early days, nearly all of your hard-earned profit needs to be pumped back into the business in order to scale it into a profit-producing asset.
When buying an eCommerce business, you’re purchasing an asset that will start producing profit, and repaying your initial investment, from day one. Your capital can immediately be used to grow the business, instead of just keeping it afloat.
Leveraging Assets For Growth
When purchasing an existing business, you’re buying more than just a brand. You’re buying an established audience, existing revenue streams, brand recognition, trusted supplier relationships, and tried and tested systems and frameworks.
These are all assets that take valuable time to build up when starting from scratch. It’s an arduous process that involves a lot of costly trial and error and increases the chances of failure.
An undeniable opportunity with buying an already-established business is that you can leverage the success it has already achieved, whether it be a strong foothold in the market, or authority within the niche.
As we saw in the study by CB insights, 35% of startups fail because of a lack of product-market fit. This is a problem that most established businesses will have already solved.
With these fundamentals taken care of, you have more time to focus on growing the business. You can leverage assets like an established audience to grow the business by launching marketing campaigns and increasing customer lifetime value.
Flipping Businesses For A Faster ROI
One of the biggest motivators for entrepreneurs trying to break into the online business industry is the desire to make more money.
By starting a business from the ground up, you’re playing the long game. It can take months or even years before your profit outweighs your costs and investments.
Not only does an established business provide you with immediate profits, but you can skip the building phase and move straight into growing the business further.
One of the key benefits of buying vs. building is that any growth strategy you implement offers a faster ROI.
This is especially true when flipping online businesses. Many businesses that are out up for sale have fairly easy problems to solve if you can align the business with your particular skill set.
An example of this is an eCommerce business that is struggling with stockout issues because of poor inventory management. If you’re proficient in inventory management, maybe you’ve worked a day job in that area, then you can build better management systems and achieve an almost instant ROI.
Deploying Capital in a Safer Way
With an established business, many of the pitfalls have already been navigated. Instead of going in blind, you’ll have data and history at your fingertips that can inform your decisions.
Take PPC campaigns for example. For startup businesses, it takes a lot of time to gain traction on your campaigns and build up an audience. A lot of money can be wasted chasing shadows while you learn more about your customer behavior.
If you purchase an existing business, you’ve already got traction, an established account, and a campaign history to inform your decisions. This gives you the knowledge to confidently spend money on PPC or social media campaigns that have a proven track record.
Buying vs. Building – Which is Safer?
According to the statistics, 20% of startups fail and 34.6% of business acquisitions fail.
Looking at these numbers alone, you could jump to the conclusion that starting your own business is the safer way to go.
As we’ve discovered, these statistics don’t tell the whole story.
While starting a business from scratch requires a smaller upfront cost and gives you more control over the identity of the business, it’ll be a while before the business will start producing any profit.
Starting a new business also comes with a certain amount of vulnerability, as you navigate market need, product development, and supplier relationships, hoping to find an audience for your product.
Buying a business requires more upfront capital, but you can recoup that initial investment fairly quickly as the business will put money in your pocket from day one.
Most of the dangers that startups face will have already been surpassed. You also have the luxury of skipping the uncertainty of the development phase and jumping right into growing the business further.
If your goal is to replace your 9 to 5 corporate day job with income from an online business, or diversify your income streams, purchasing an existing business is the fastest and safest way to secure a steady income.
How to Buy an Online Business
One of the biggest risks when purchasing an online business is finding a safe asset to buy.
Transparency is the name of the game. You need to find a business that not only compliments your strengths, but one where the assets, opportunities, and profits are accurately represented.
Buying a business from our trusted marketplace is a great way to alleviate this risk.
We pre-vet all of the businesses we sell to ensure you’re buying a quality asset. We also assist with the mediation and migration process, giving you more time to focus on growing your new business.
If you’re excited to take the first step towards online entrepreneurship, browse through the fantastic businesses listed on our marketplace.
Register for a free account and have your own research dashboard where you can save searches, set notifications when new businesses matching your criteria come onto our marketplace, and filter search results to find the best business for you in seconds.
The power to change the way you earn money is in your hands, all you have to do is make the first move!
Before this pandemic, I have also started an online business but it was not successful so I have to drop my business in 2nd year. So, I can understand now where I was lagging behind. I had never thought about buying an online business. I will think about it definitely.
Thank you for sharing this information.