So you want to be your own boss. Consider the options: start your own business or buy an existing company.
Certainly there are pros and cons to each option. If you do a careful analysis, you’ll learn what many seasoned entrepreneurs have discovered … 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. On the other hand, purchasing an existing business reduces an entrepreneur’s risk while creating opportunities for tremendous profit.
There are a number of reasons to consider the purchase of an existing business rather than starting one:
- Proven Concept. Buying an established business is less risky – as a buyer you already know the process or concept works.
- Brand. You’re buying a brand name. The ongoing 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 attract new business than with an unproven start up. That’s an intangible benefit that’s difficult to put a price on.
- Relationships. With the purchase of an existing business, you will also be buying an existing customer base and vendor base that took years to build.
- 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.
- 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 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. Some experts say start-ups aren’t expected to make money for the first three years.