Making the right legal choice can significantly impact the success and longevity of your business.

In this article, we'll examine the legal pros and cons of starting a business from scratch versus purchasing an existing small business. By gaining a deeper understanding of the legal implications of each option, you'll be better equipped to make an informed decision that sets your business up for success.

Understanding your motivation

Before you decide whether to launch a startup or buy an existing business, it's essential to understand your motivation. This source of personal motivation is sometimes called your 'why' and varies from person to person.

Some people are motivated by money, while others want more flexibility and freedom. You may have come up with the next billion-dollar idea or want to be your own boss and have control over your work.

Understanding your motivation will help you decide which factors matter most to you in your quest to get started.

Due diligence

Buying an existing business is a quick solution if time is of the essence. However, paying attention to the complexities and time involved in the due diligence and legal work required to complete the purchase is essential.

Before you close the deal, you need to understand every aspect of the business. This includes:

• Contracts
• Employee terms
• Lease and asset documents
• Inspecting all their equipment
• Intellectual property rights
• Statutory accounts
• Management accounts
• Invoices
• Receipts
• Cashbooks

Launching and growing a startup business may be quicker to get off the ground than buying an existing business. While you may begin trading more quickly, you won't have the benefits of an established presence or a customer base.

Regulating affairs

To ensure smooth operations and avoid potential conflicts, it’s crucial to establish a transparent system for regulating affairs when entering into a business partnership. This includes discussing and agreeing on essential matters such as decision-making processes, profit sharing, and responsibilities.

When purchasing an existing company, it may be necessary to restructure the current shares to align with your goals and objectives. It\s also essential to have a Shareholders Agreement in place to outline the rights and obligations of each shareholder.

Even if you are starting a business on your own, it is still important to carefully consider the business structure of your entity. Depending on your specific needs and circumstances, you may need to choose between operating as a sole trader or setting up a company.

By doing so, you can ensure that you have the appropriate legal and financial framework to support your business endeavours.

Building a team

If you purchase a business with an existing workforce, the employees will have the right to transfer with the company and keep their jobs on the same terms and conditions under the TUPE rules. This restricts your team-building flexibility, at least in the short term.

By contrast, if you launch your own startup, you will have total control over your hires and fires. As such, if you pride yourself on your talent spotting and love building successful teams, this will likely appeal.

Funding options

When seeking funding for a startup, it’s important to consider that banks may be more inclined to lend to an established trading business rather than a new startup.

If a bank does decide to fund a startup, it may require additional security in the form of Directors' Guarantees, which can increase the immediate risk profile of the business.

Therefore, exploring alternative funding options such as angel investors, venture capitalists, crowdfunding, or government grants is important. These options can provide capital without requiring the same level of collateral as traditional bank loans.

Future claims

When you buy a business, you typically inherit its trading liabilities unless you can agree to the contrary with the seller. This presents a risk that can sometimes be difficult to predict and cost.

In contrast, going down the startup route means you can carefully manage the business's trading to mitigate risks accordingly. Everything is under your control, so there are no surprises in store.

Legal pros and cons of launching a startup versus buying a small business

Here is a recap of some legal pros and cons of each option:

Launching a startup

Pros

• There are no prior legal obligations or liabilities, allowing for greater flexibility in decision-making
• You have total control over your hires and fires, allowing for greater team-building flexibility
• You create your own story and can carefully manage the business's trading to mitigate risks accordingly
• You can retain intellectual property rights and brand equity from the outset

Cons

• The time-consuming process to incorporate and register the business
• It may require significant investment to start and build the business
• No established presence or customer base, which may limit growth potential
• Greater legal responsibility and potential liability, as you’re personally responsible for the business's debts and legal obligations

Buying a small business

Pros

• Existing trading presence and pre-existing customer and supplier base may provide an immediate revenue stream
• Less time-consuming than starting a new business from scratch, as you do not need to create a new legal entity
• An established brand name, customer base, and operational systems can provide a competitive advantage
• Assets, including intellectual property, are already in place

Cons

• Due diligence and legal work required to complete the purchase can be complex and time-consuming
• Inherent trading liabilities from previous ownership may present future claims
• Limited flexibility in team-building due to the rights of existing employees to transfer under TUPE rules
• Funding may be more challenging, as banks prefer lending to established businesses rather than new ventures

Wrapping up

In summary, deciding to launch your startup or buy an existing small business requires careful consideration of each option's legal advantages and disadvantages.

Consulting legal professionals at LawBite can provide the necessary guidance and insights to make an informed decision that will lay the foundation for your future success.