Starting vs Buying a Business

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Starting vs Buying a Business

Small BusinessMillions of people have a dream of owning their own business. My guess is that you’re one of them.

That dream may have been born from seeing other people successfully operate their own businesses or from imagining the freedom owning a business might provide. Many people that want to own a business think only about starting one. But the idea of buying a business – one that is already successful – should be given at least as much consideration when you start thinking about going out on your own.

Though this may not be ironclad, as a rule, buying a business is generally a better option than starting one from scratch. Unless you have invented a perpetual motion machine that will change the way humanity functions or an algorithm that can infallibly predict exactly what markets are about to do, the chances are that starting your new business from scratch will involve significantly more challenges, sleepless nights and risk to your capital.

Starting a business presents long odds to the the founders and the risks are much greater than those that buying a business entails. Eighty percent of startups fail within five years. How’s that for a statistic that’ll get your attention? Buying a business significantly increases the likelihood that you will succeed for the simple reason that an existing business already a track record that allows you to examine its performance over multiple years and, with that knowledge, proceed with far greater certainty about the probability of its continued success.

Besides, buying a business is easier and more predictable. It is likely to increase your chances of success.

There are many excellent reasons why buying a business might be the preferable route rather than starting one up from scratch. Let’s examine a few of them.

Existing clients and customers

An existing business has a client or customer base. You will not have to build that base from scratch and assume the risks that starting a business – which, of course,has no customers – entails. People are already coming in the door and paying for whatever products or services the business offers. Yes, you may well want to expand that customer base but you will have the luxury of knowing that, absent taking your eye off the ball, the business will continue to function – and generate revenue – while you do so.

Existing Revenue

If you buy an existing business, at the end of your first day on the job you will be able to make a deposit of funds from sales. There is no small amount of security in this knowledge, a fact that I can attest to as having started several businesses myself, not all of which were successful. Buying an existing business, while always fraught with some level of anxiety, significantly reduces the likelihood of sleepless nights and the bulk purchase of antacids.

It is difficult to overstate the importance of existing revenue and the security it provides. Both starting and buying a business entail some risks but buying a business enables you to see the future much more clearly insofar as you are secure in a steady revenue stream as you get acclimated to your new environment.

Buying a Business is Easier

Now, I’m not talking about a lemonade stand here, but starting a business is a challenge. It involves setting up the business from a legal Employeesstandpoint, establishing an entity and registering that entity with all the appropriate government offices. Once your business is a “thing”, you must build and establish a presence online – a website and social media accounts. You must start sourcing products or materials, establishing vendor accounts, make sure your new business meets all the licensing requirements and secures all the appropriate permits. You have to start looking for the appropriate location to site the business and establish a physical presence. You must analyze, choose, source and set up all the furniture, fixtures and equipment needed to operate the business. While you’re doing all that, you have to recruit, interview and hire staff to help run the business. You’ll need to set up policies and procedure manuals, employee manuals, payroll systems and deal with countless other administrative headaches that will tax your patience and lead to even more sleepless nights.

When you buy an existing business, all these things have been done and are in place. Once you make the decision, you walk in the door of your “new” business and all cylinders are firing. You can focus immediately on growing the business.

I don’t mean to imply here that buying a business is a walk in the proverbial park. I’m also not saying that it would be less costly because it will not be. The person who started the business you are buying did all those start-up things I just mentioned – and more – and the costs and time invested in the effort has resulted in the business’ performance level and is, thus, reflected in the business’ value. (Note that I did not say “price”. More on that in a moment.)

Start or Buy: Some Considerations

Consult with Advisors

If, after reading the above, you’re still seriously considering starting a business, we are business advisors as well as brokers. We’ve analyzed and sold many business in many industries over the years but we have also advised on many startups, including our own. As a result we have a deep bench of talent with a great deal of experience with the startup process. We would be happy to help you with yours either as an active consultant or as a coach to guide you throughout the process. If you’d like to explore how, let me know in the box right here…..↓↓↓↓↓

If, after reading the above, you have made the decision to buy an existing business, we can help and guide you in that quest, as well. Do you know what type of business you want? Do you have an amount in mind that you expect to invest? Are you looking for a strategic acquisition to buttress your existing business or are you looking for a stand-alone acquisition?

We have a team of experienced professionals – from business brokers and M&A specialists to attorneys and accountants that specialize in business acquisitions – that can help you. But whether it’s us or others, find and use professionals experienced in business acquisitions.

Is it Priced Right?

Back to my comment, above, of “price” and “value”. Ask any seller of a business – or any business broker about a business he or she represents – and you’ll learn the price. What you are unlikely to learn is the value.

Business ValuationSome business brokers ask sellers what they want for their business and that’s the price they list. Good business brokers analyze the business’ history, the industry it’s in, its financials and tax returns, and day-to-day operations and then tell the owners what the market value is. Assuming the sellers agree to offer the business at a “price” close to the “value”, the likelihood of a successful transfer is high.

Good brokers will be able to illustrate a business’ value to you, the buyer. The marketing materials a good broker prepares will take a buyer on a step by step tour of how the price was arrived at. Find a broker that does this.

On the M&A side of our business, we represent buyers which means we ask for the necessary data from the seller and do the analytical work for the buyer, our client. We’re able to tell our client what a particular business is worth and whether the asking price is even remotely related to value.

Our brokers get calls all the time from business owners that are ready to sell and say “…and I want $XX for it.” What a seller wants for its business and what that business is worth are usually two completely different numbers. (Check out this article for details on this.)

The Bottom Line?

Whether to buy an existing business or start one from scratch depends on many variables, not least being the risk tolerance of the buyer. But for all the reasons mentioned above, buying a business would, at least from my perspective, seem like the easiest route to get into the CEO’s office.

If you’re thinking about buying a business, one of the most pressing aspects of the process is trying figure out what the business is worth so that you can make an intelligent offer for it. We do business valuations all the time and I’ve put together a list of the basic data a business broker needs to start the valuation process. We generally provide this list only to our business broker subscribers – and for anyone that wants to become a business broker – but I want to make it available to you for reading this post. You can download it for FREE by filling in and sending this form to me.

The list will be delivered to your email box immediately.

What’s Next?

Buying a business is an extremely exciting event in anyone’s life. It can also be an extremely nail-biting one. But once the deal is done, the feeling of owning your own business in like no other. I’m an evangelist for business ownership. I want to teach people how to buy and teach others how to become business brokers so that they can help still others. I get a kick out of it. It gets me up in the morning and I would be delighted to help you. Send me an email (below) if you’d like to chat about it.

If you have any questions, comments or feedback, I want to hear from you. Put them in the Comments box below. For instance, what is your biggest concern about the process of buying a business? Let me know. I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.

I’ll be back with you again next Monday. In the meantime, I hope you have a profitable week!

Joe

The author holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) and can be reached at joe@WorldwideBusinessBlog.com

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