If you want to be your own boss, you have a few options. You can work as an independent contractor, you can start a business or you can buy one.
Each of these involves potential risks and rewards. What many seasoned entrepreneurs discover is the risk-to-reward ratio is tipped in their favor when they buy a going concern.
As an independent contractor, your risk is minimal. You have limited up front investment and overhead costs. But without leveraging the work of an employee base, your returns are limited by your own personal capacity.
Starting your own business can pay great dividends, but the risks are significant. The unfortunate reality is that 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 in five years.
On the other hand, by purchasing an existing business, an entrepreneur reduces his or her risk while also gaining an opportunity for tremendous profit.
Here are seven reasons why purchasing a business may make better sense and provide greater value than starting one:
1. Proven concept. Buying an established business is less risky because you already know the process or concept works. Getting financing for a purchase is often easier than getting funding for a start-up for just that reason – the business has a track record. The bank will have historical results to lend on, not just projections.
2. 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 is easier to place cold calls and attract new business than with an unproven start up. That’s an intangible benefit that’s difficult to put a price on.
3. Relationships. You will also be buying an existing customer and vendor base that took the seller years to build. Commonly, the seller stays on and transitions with the business for a short time to transfer those relationships to the buyer.
4. Focus. When you buy a business, you can begin work immediately and focus on improving and growing it right from the start. 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 details such as computers, phone systems, furniture and policies that do not directly generate cash flow.
5. People. In an acquisition, often 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.
6. Cash flows. 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 businesses aren’t expected to make money for the first three years.
7. Risk. Even with all these advantages, some entrepreneurs believe it is cheaper, and therefore less risky, to start a business than to buy one. But risk is relative. A buyer may pay $1 million, for example, 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 flows can support the purchase price. To 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.
Nancy Schott is director of the Milwaukee division for Cornerstone Business Services. She can be contacted by telephone at (262) 879-9890 or by e-mail at nschott@cornerstone-business.com.
May 27, 2005, Small Business Times, Milwaukee, WI
