Buying vs starting a business… Which makes more sense?
I often speak to groups of potential entrepreneurs and this question always comes up. The answer, of course, is that it depends.
It depends on the amount and availability of capital each approach requires. It depends on the level of risk the entrepreneur can tolerate. It depends on the type and level of talent needed. It depends on the availability of financing. It depends, it depends, it depends….
If the person asking the question has an idea that no one appears to have done before and the capital can be raised to pull it off, starting a business may – MAY – be worth serious consideration.
But starting a business entails significantly more risk – both financial and emotional – than buying one. Let’s take a closer look.
There is a significant amount of work that needs to be done whether the entrepreneur buys or starts a business. A lot of research, study and analysis goes into both options. But an existing business has the advantage of historical performance that can be analyzed. In addition, if the existing business is profitable, its profitability should demonstrate that there is a proven market for its products or services.
Staring a business will entail a period during which the business owner will need to prove that a market exists for planned product or services. This market research period could be costly and require a lot of time.
Buying a business allows you to make a deposit at the end of the first day of ownership – which is actually the first payment representing a return on your investment. Starting a business will likely mean many weeks, months or even years before reaching profitability. This is one part of the experience that generates a level of stress not present when you buy a business.
Buying a business is like getting a head start on the buyer’s financial or retirement goals. The start up phase is past. No market research regarding the acceptability of the business’ products or services needs to be done.
Getting a Head Start
An existing business already has a staff in place, an established customer base, existing vendor relationships, and processes and procedures laid out. Buying gives you a head start over starting.
But this is not to say that buying reduces the research required. It just means different research.
Before buying a business, an entrepreneur needs to get answers to a wealth of questions. This is the process of “due diligence” and it must be done thoroughly.
One of the best ways to get through the due diligence process is to bring on some experts. Hiring a professional business broker – ideally a Certified Business Intermediary (CBI) – will help the buyer determine, among other things, what the business is worth. But a professional business broker working for the buyer will know the right questions to ask to get the fullest picture of the condition of the target business.
• Is there a list of intangible property such as trademarks, patents, website ownership, etc.
• Have all taxes been paid?
• Are licenses and certifications current?
• Copies of all contracts: purchasing, sales, employee, leases, etc.
• What kind of reputation does the business have. Will the buyer be proud to own it?
• Clean and comprehensible financials (often a challenge with small businesses)
And dozens of other questions that, given his or her training and experience, a business broker will know must be answered.
Our course, The Basic “How-To” of Becoming a Business Broker”, teaches how to become a professional business broker.
Become a Professional Business Broker…
The Bottom Line
Arguably, the most important question relates to value. Yes, value is in the eye of the beholder and one person will see more value in a certain business, car, house or pack of chewing gum than will another.
But businesses can be valued based on what similar businesses have sold for in the past. This tells the buyer what others are paying for similar businesses and it assures the buyer that he or she is not over-paying. It can also provide an estimate of the return on the buyer’s investment.
What’s the value of the business? What will the acquisition target price be? Is the seller asking for an amount that is reasonably close to value? Does the seller even know what the market value is? This is where a professional business broker is worth far more than the fee earned.
(How to value businesses is a topic we cover at length in our course, The Basic “How-To” of Becoming a Business Broker
If you have any questions, comments or feedback on this topic – or any topic related to business – I want to hear from you. Put them in the Comments box below. Start the conversation and 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!