CEO at Tresle, a tech-enabled platform and M&A services firm that simplifies the transition of ownership for small to medium-sized companies
Becoming a business owner is commonly associated with starting a business. However, another path to entrepreneurship is through acquisition, or purchasing an existing business.
While starting a business gives you a blank slate to create exactly what you want, making it operational and profitable can be a difficult process. The riskiest part of starting any new business is figuring out whether a business model will actually work. On the other hand, there are many benefits to buying an existing business with a proven track record.
When you’re starting a business, one of the core questions founders ask themselves is, “How are we going to make money?” Cash flow is the lifeblood of any business, big or small, and competing in a market as a newcomer can be very difficult because founders are starting with zero customers, zero brand name and zero income. Fortunately, this isn’t the case if you’re buying an established, existing business.
This idea of momentum extends far beyond a business’s financial performance. Buying a business brings established relationships with vendors, customers and employees. Starting out with the operational systems that presumably made the company attractive enough for you to buy it in the first place removes risks associated with the time and energy spent seeking out, creating and growing these systems incrementally.
And did I mention the cash flow?
Likelihood Of Success
Data from the U.S. Bureau of Labor Statistics states just over 20% of new businesses don’t make it past their first birthday, only about half see their fifth birthday and failure rate declines with time as you approach 10 years. This means that if a business has weathered the test of time, chances are the business found product market fit, was able to generate income and built some sort of sustainable operation. In other words, some of the initial risks that new businesses face have been removed.
This can be further backed up if we look at the default rates on the Small Business Administration’s (SBA) 7(a) loan program, a leading financing method for small business acquisitions. Over the last 12 years, the percentage of loans that resulted in a charge-off (which measures loans that the SBA considers uncollectible) was 3.9%.
So, is buying a business right for you?
What To Consider Before Buying
What you see on the outside may not be a true picture of how the company is run under the hood. Establishing a thorough due diligence process is essential for spotting potential issues and providing a basis for comparison when evaluating one opportunity to another.
Buying a business undoubtedly has barriers to entry—the top one likely being capital. Small business lenders often require a minimum of 10% equity injection (i.e., down payment). This means that if you were interested in buying the company for $1,000,000, you would need a minimum of $100,000 to commit (oftentimes, half can be in the form of a seller note). This is, of course, oversimplified, and other costs will be incurred (like professional fees and closing fees).
If you have a truly unique business idea that you are deeply passionate about, starting a new business may be your only option. However, if you have skills or a general interest that you care about, consider looking into businesses for sale that could be a potential fit. Buying an existing business is a function of where you can best put your skills to use.
Buying a business offers you a foundation to fulfill your entrepreneurial desires and leave your imprint, and it is a radically different career path and lifestyle than starting from scratch (or working for someone). From Day 1, it allows you to lead, make decisions that matter and have a direct impact on your ability to earn
(Forbes Business Council)