So, you want to be your own boss. There are certainly pros and cons of buying a business or starting one. If you do a careful analysis, you’ll learn what many seasoned entrepreneurs have discovered—that the risk-to-reward ratio is tipped in your favor when you purchase an existing business.
Starting a business of your own can pay great dividends, but it’s important to understand that the risks are significant. Most start-up businesses will falter and eventually die. According to Michael Gerber, author of the E-Myth Revisited, 40 percent of new businesses fail in the first year, and 80 percent fail within five years. Those are frightening odds for entrepreneurs, but one way to give yourself a better chance for success is by purchasing an existing company.
Purchasing an existing business reduces an entrepreneur’s risk while creating opportunities for tremendous profit. There are several reasons to consider buying a business vs. starting one.
Proven Concept. Buying an established business is less risky – as a buyer you already know the process or concept works. Financing a purchase is also typically easier than securing funding for a start-up business for that very reason—the business has a track record.
Brand. When you purchase an existing business, you’re buying a brand name with a track record of success. The on-going benefits of any marketing or networking the prior owner has done will transfer to you. When you have an established name in the business community, it’s easier to place cold calls and attract new business than with an unproven start up. When starting a business vs. buying one, entrepreneurs have to start from scratch and spend years and significant resources building up their brand identity in the community.
Relationships. With the purchase of an existing business, you’re also buying an existing customer base and vendor base that took years to build. It’s very common for the seller to stay on and transition with the business for a short time to transfer those relationships to the buyer. This saves your new enterprise months of legwork creating new business arrangements and partnerships.
Focus. When you buy a business, you can start working immediately and focus on improving and growing the business immediately. The seller has already laid the foundation and taken care of the time-consuming, tedious start-up work. Starting a new business means spending a lot of time and money on basic items like computers, telephones, furniture and policies that don’t directly generate cash flow. By purchasing an existing company, you skip this arduous task and can hit the ground running immediately.
People.In an acquisition, one of the most valuable and important assets you’re buying is the people. It took the seller time to find those employees, develop them, and assimilate them into the company culture. With the right team in place, just about anything is possible and you will have an easier time implementing growth strategies. Plus, with trained people in place you will have more liberty to take a vacation, spend time with family, or work on other business ventures. When start-up owners and independent contractors go on vacation, the business goes too.
Cash Flow. Typically, a sale is structured so you can cover the debt service, take a reasonable salary, and have some left over to take the business to the next level. Start-up owners, on the other hand, often “starve” at first, putting as much of their own money into the business as possible. Some experts say start-ups aren’t expected to make money for the first three years. When you purchase a company, you can skip these lean years and go right into the profitability stage of the enterprise.
Risk. Even with all these advantages, some entrepreneurs believe it is cheaper, and therefore less risky, to start a business than to buy one. But the risk is relative.
For example, a buyer may pay $1 million, for example, for an established business with strong cash flows of approximately $200,000 to $300,000. A lending institution funds the transaction because historical revenues show that the cash flow can support the purchase price. For many people, however, that is far less risky than taking out a $300,000 loan with an unproven concept and projections that may or may not be realized.
Becoming your own boss always involves a risk. When you buy a business, you take a calculated risk that eliminates a lot of the pitfalls and potential for failure that come with a start-up. If you’d like to hit the ground running by purchasing an existing business, get in touch with Sound Business Brokers today!
