START ONE OR BUY ONE?
For over 30 years my company has sold businesses, mostly to individuals who wanted to own their own business, and had never owned one before. We also sell businesses to companies looking to expand or to diversify, but this article is about the decision an individual faces when they decide to go into business for themselves.
You have two choices if you want to own your own business; you can start one from “scratch”, or buy one. You can buy a franchise, but if it is a new or start up franchise (not a resale of an existing franchised business), it is kind of like starting from scratch, but hopefully with a proven concept, or one that will be successful.
What’s best for you depends on a variety of factors; here I want to address risk and money related factors from what I have witnessed for the past 27 years, selling businesses, franchises, and working with clients who started their business from scratch.
Risk. Will you survive, achieve success, get a return on your investment of time and money? Starting a business is risky; more risky then buying a business or a franchise. There are spectacular success stories; but more failures then successes. The successes have to do with a great product or services, and enough capital to get it going and stay operating until cash flows.
Buying an established business is the least risky; you have a chance to see the past, you have customers, employees in place, a proven market, an infrastructure, and the chances are relatively good you will make money from day one-depending on how you buy it and finance the purchase and your due diligence. Success is not guaranteed, but the risk is mitigated by the fact the business has a history. Price is in part a function of prior operating history; highly successful businesses cost more then relatively less successful businesses; theoretically your risk is less therefore, by buying a successful business and paying more. Buying a new franchise (not the resale of an existing franchised business) presents many of the same risks that a startup has, but at least you can evaluate the concept, talk to existing franchisees, check out Franchisor management etc
Return. Econ 101 tells us risk is tied to return; more risk should provide more return. A startup carries with it high risk and the return could be great-it had better be worth the risk in other words, in terms of reward or return or you shouldn’t do it. Buying an established business carries risk too, but the odds are better that you will survive and achieve a return because the business you buy has a history that can be measured and calculated. Buying a new franchise, as stated carries many of the risks as a new startup, and therefore a buyer should expect a return commensurate with that risk, or it is not worth doing.
This issue goes to the reason(s) people go into their own business or decide to buy their own business. We ask people why they are considering their own business; invariably the answer will include “I want to be my own boss”. We expect that and probe further. Many individuals, visit a Business Broker because they face an adversity, real or perceived, pending or upon them, and buying a business begins to appear to be a viable alternative to working for someone else. Success may be providing for family and hopefully maintaining equity or growing it so that someday the sale of the business will provide for retirement. Hefty returns on investments, going public, being featured in Forbes is not part of the plan. If that describes you, buying an existing business may make the most sense for you.
There are some realities, mainly concerning money, that “most folks” have to face, when deciding how to proceed once going into business for themselves is being seriously considered- all related to risk and return. When I say “most folks”, I am not talking about those fortunate enough to have large trust funds, or for whatever reason money is no object. Everyone else has to be concerned with groceries, mortgages, cars, health care coverage, college tuitions, etc. Startups, and new franchises require money in some amount, usually larger amounts then anticipated, going out for some period of time, and very little, if anything coming back in for a period of time, usually longer then anticipated. Buying an established business, after proper due diligence, is more likely to result in survival, and the ability to buy shoes for the kids as well as to fund the business operation. Financing the purchase is a key part of the equation.
There are a variety of ways to value a business, and to finance an acquisition of a business; neither issue is one I will address here, except that most of what I have read concerning both, compared to what I deal with in the real world of actually selling businesses and finding acquisition money to complete transactions are humorous and not very helpful to novices like first time buyers.
Realistic valuation of a business, one that has a history, and some success, like 90% of the businesses I sell, will result in the business being sold, and the purchaser being able to find financing for the purchase, and the terms of said financing will allow the purchaser to pay debt service and buy groceries. It is done all of the time, and lenders, in the game of providing money to those who choose to go into business for themselves, make money by financing acquisitions, and there are plenty of these type lenders in the market, even now despite the “sub-prime crisis”. So unless you have unencumbered funds available, enough to not worry about your personal expenses, and if you need to borrow money to buy a business, buying an existing business is your best option. Further, lenders who we deal with, who know what they are doing, will not lend on a deal where the price is too high, the debt too heavy, or if the “fit” of the would be purchaser and the subject business isn’t a good one.
The decision to go into business for yourself is a big one, maybe the most significant economic and personal decision you will ever make. The decision to buy an existing business, or start a business, or to buy a franchise, must take into account multiple factors. Your background and experience, your strength and weaknesses, the industry you’re considering, competition, the general economy and the outlook, availability of labor etc. all have to be considered. What do you want to do when you get up in the morning? Once being seriously considered, risk, return and economic survival need to be realistically evaluated, and then you can proceed to start a business, or to start looking for a business to buy.
Bob Griesgraber is a partner in the firm Opportunities in Business, which specializes in the sale of small businesses, established in 1981. He can be reached at Bob.Griesgraber @oibmn.com. or visit the company web site at www.oibmn.com
OIB founder, Bob Griesgraber, was in the news recently with an article that appeared in the Minneapolis Star Tribune. The article, entitled ‘A Business That Comes With A Paycheck’, demonstrated the benefits of acquiring an existing business vs. launching a start-up. Click here to read the full article.