In the age of corporate downsizing and tough economic times, job security has become a thing of the past. For some of us it makes sense to control our own destiny, strike out on our own, and do our best to create our own path.
If you decide you want to be in business for yourself, or if you have become a forced entrepreneur because of the current job market or circumstances, you basically have two options: start your own business/franchise 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, and has been a route to success for many people, but it's important to understand that the risks are significant. Unfortunately the majority of start-up businesses will falter and eventually die. According to Michael Gerber, the author of The E-Myth Revisited, 40 percent of new businesses fail in the first year and 80 percent fail within five years. That means that by year five only two out of 10 start-ups are still in existence.
Buying a business reduces an entrepreneur's risk and creates opportunities for tremendous profit. There are a number of reasons to consider buying a business rather that starting one:
PROVEN CONCEPT: Buying an established business is buying a known commodity -- as a buyer you already know the process or concept works and has worked for the life of the business. If, for example the business has been operating 10 years, it should give the buyer comfort that, at least in the immediate past, the public feels that the business serves a need well enough that the business has been able to function. With a start-up, the entrepreneur must rely on market research, proforma projections and some gut feelings about the likelihood of market acceptance. Without real historical business data the entrepreneur is taking a significant risk that their research will provide the desired result.
Lenders recognize this risk. Financing a purchase is often easier than securing funding for a start-up business for that very reason -- the business has a track record. A bank will be able to look at the historical results for the business to determine the viability of a loan request.
BRAND: You're buying a brand name and the goodwill built by that brand. The ongoing benefits of any marketing or networking the prior owner has done will transfer to you. When you have an established name, it's easier to place cold calls and attract new business than with an unproven start-up. Many customers and suppliers will have a better confidence doing business with an "established" business than with a new venture. 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 a customer base and vendor base that took years to build. Some vendors may not even be available to a start-up venture because of established dealership and other type relationships. It's common for the seller to remain with the business during a transition period. During that time the previous owner will try and transfer those relationships to the buyer.
FOCUS: When you buy a business, you can start working immediately, and focus on improving and growing the business. The seller has already laid the foundation and taken care of the time-consuming and often tedious start-up work. Starting a new business means spending a lot of time and money on basic items like computers, telephones and furniture, and exploring regulatory requirements and policies that don't directly generate cash flow.
PEOPLE: Most business owners will tell you that one of their biggest challenges is finding and maintaining qualified employees. 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. They also went through many that did not work out. 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. Startup owners, on the other hand, often "starve" at first. Some experts say startups aren't expected to make money for the first three years.
RISK: Even with all these advantages, some entrepreneurs believe it is cheaper, and therefore less risky, to start a business than to buy one. Risk is relative. A buyer may pay $1 million 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 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.
David Yezbak is the owner of Sunbelt Business Brokers in Augusta.