To Buy a Business or To Start a Business?
By E- Myth Business Blog – August 2009
Little gets our entrepreneurial spirits soaring like the vision of ourselves as the CEO of a successful startup. Whether you’re brand new to business or a serial entrepreneur, the allure of starting out from nothing, nada, zip… and then building a world-class business is a thrilling concept. But we can’t ignore the risks. Starting a new business is difficult, grueling work and the failure rate is high. Going out on your own with a brand new idea — a business without any history or any kind of track record — is a big gamble.
Many people only consider starting a business from scratch but another viable option is to buy an established, existing business. The most important thing you can do is to consider all options before striking out on your own.
Why Go With an Existing Business
Okay, we agree that the startup business may be more exciting and potentially more rewarding (think IPO). So what are the advantages of purchasing an already established business? Here are a few things to ponder:
- § Reduced risk – The unfortunate truth is that most startups will falter and eventually die. According to the Small Business Administration only 44 percent of businesses survive at least four years in business. And it takes an average of two years to be profitable.
- § Easier time getting financing - Typically lenders will allow up to 50 percent or more of the purchase price of an ongoing business, while startup funding is either non-existent, subject to the whim of the venture capitalists or requires putting up personal capital.
- § Established relationships - Buying a business gives you immediate access to an established customer base and to existing suppliers. Both provide distinct advantages over wondering about where to find customers and trying to induce suppliers to provide your untried start up inventory, materials and supplies, all at the best credit terms.
- § Positive cash flow - Positive cash flow provides instant income to the purchaser. Typically, a sale is structured so you can cover the debt service, receive a reasonable salary, and have some cash left over to take the business to the next level. Startup owners often aren’t expected to make money for the first few years.
- § An ally - The seller can serve as your ally; lending support, guidance and training, and often assisting with the financing too. When they have a real stake in your success, they’re there to lend a hand.
- § The freedom to focus - When you buy a business, you can start working right away focusing on improving and growing the business immediately, since the seller has already laid a strong foundation and taken care of the time-consuming, tedious startup work.
Purchasing an existing business reduces an entrepreneur’s risk while creating opportunities for tremendous profit, along with offering more available financing possibilities.
Not All Businesses Are Created Equal
At E-Myth, we tell you to build your business as an asset with repeatable, reliable systems in place so that if and when you decide to sell your business, you can get top dollar for it. When you think about it from the buyers perspective, an E-Myth’d business is infinitely more attractive than one that has no standards, no systems, no reliability or predictability!
With your E-Myth perspective, you’ll look for a business that offers the points we spoke to above, but also one that has designed and documented systems that you can easily follow. You’ll look for a turnkey operation, one that you can walk right into and run in the same profitable way as the previous owner — right from the beginning.
Buying an established business should provide you with proven business concepts and systems, with proven products or services and a proven marketing and sales strategy. You should also gain immediate credibility and the perception of business success from the greater community, since the previous owner’s efforts are now yours’ to build upon. In this same vein, you also receive all the benefits and goodwill associated with a positive reputation, along with any advantages associated with name and location. Indeed, sometimes location is key and the purchase is consummated primarily for the location since the alternatives are either too expensive or don’t exist.
Another valuable asset in any acquisition is the trained employees already in place. The current owner took valuable time to recruit and hire them, develop them and assimilate them into the company culture. With the right team in place you will have an easier time implementing growth strategies. Plus, with trained employees you will have more liberty to take a vacation, spend time with family, or work on other business ventures. With a startup, when the owners and independent contractors go on vacation, the business goes on vacation too.
Do Your Homework
Ultimately this decision is all about risk control. An existing business has inherent risk; but probably not as much as a startup if you perform your due diligence. Many buyers driven by emotion rush into a deal without adequate research into the proposed venture. To minimize risks, take all necessary precautions and don’t rely on your personal judgment alone.
The difference between failure and success lies in a careful analysis of all the relevant factors, whether you’re starting a new business or purchasing an existing one. If you don’t have enough experience in any given area, seek professional advice to help you make good decisions. While there are no guarantees in business, and the risks must always be managed, buying an established business clearly offers significant advantages worth considering. Of course, the startup offers plenty of advantages too and the financial rewards along with the satisfaction of building it from the ground up can be huge.
We certainly aren’t trying to discourage your entrepreneurial adventure. For some people, starting a business from scratch is the only way to go. But if you’re just in the “thinking about it” stage, you may want to consider purchasing an existing business first.
Remember, 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 likelihood for failure that comes with a startup, while the potential of the startup remains at the core of the true entrepreneur.