As we come out the other side of the global pandemic there will be an influx of displaced professionals that will enter the entrepreneurial arena armed with a severance package and or nest egg of dollars to propel their business interests post Covid-19. The following highlights critical elements to take into consideration when making the fundamental decision; Do I start a new business or buy an existing business?
People that are starting a new business means they are thinking about starting from the ground up. They have an idea and decide to build the company from scratch. Unless the idea is novel and the business fills a significant market niche that is under-serviced or unattended, developing your own idea and building the company from the ground up presents some disadvantages as well as hurdles to acknowledge and overcome. Starting from scratch means you will be confronted by the task of introducing and marketing the new business, including the challenges associated with building a new and loyal customer base, overcoming competitive threats and establishing the company as a leader in its market segment. Other elements like hiring and training employees to create a corporate culture should not be overlooked. What are the skill requirements of your employees? Are they available in your market and at what cost? Finally and possibly most important, financing a new business without a proven track record can and will be a daunting task. Financing, the blood line of most businesses, must be in place and take into consideration various contingency plans as the first 3 years of your business will have peaks and valleys to overcome. Statistically, during the first 36 months most businesses will fail due to undercapitalization. They ran out of cash to support the growth of their business. In most cases starting a new business is typically reserved to seasoned entrepreneurs with existing revenue streams, a network of marketplace alliances, professional advisors and a solid reputation with the financial community.
Upon reflection, if starting a business from the ground up is not for you, buying an existing business may be a better fit. When buying a business you should focus on an industry you are familiar with and understand. The business should match your experience and skill set. Another important consideration is to determine the size of the business in terms of the number of employees and sales. When searching for a business speak to business brokers, lawyers and accountants. Not all businesses are advertised as being “For Sale” and a network of industry insiders can play an integral role in your search. Key questions need to be answered. Why is the business for sale? What is its reputation and does it have a strong relationship with suppliers? Is the marketplace it operates in expanding or declining? Is the marketplace saturated with competitors? Is the business scalable? What is the sales history? Are sales gradually declining or steadily increasing? Can the business be further expanded through acquisition? All these questions and more need to be answered during the due diligence process.
When buying an existing business you are taking over an operation that is already generating cashflow and profits. Commonly referred to as “bankable”. You inherit a predetermined level of sales and profitability. The business will have an exiting staff that is trained and knowledgeable of all aspects of operations as well as an existing customer base. The company will have already been marketed and have a defined position amongst competitors. Although you do not have to re-invent the wheel, it is important to determine where improvements can be made. It is critical to access the strengths of the business and how to maximize current revenue streams and the possibility of creating new ones. By way of example, the company may not have an e-commerce platform. There may also be operating inefficiencies that can be cured, lowering operating expenses and maximizing profits. It is important to get a full grasp and understanding of operations and the businesses customer base prior to making changes so as not to destabilize the company and risk losing customers. As a new owner your existing employees will be skeptical and resistant to change. It is critical to foster trust and establish a buy-in prior to making significant changes, referred to as the transition period. Over-communicating during this period is beneficial.
Although buying an existing business is initially more expensive than starting a new business from scratch, bankers and investors are far more comfortable financing a business that has a proven track record with existing assets and possibly legal rights such as patents. Upon identifying the business you want to buy it is essential to put together your industry specific acquisition team. Your lawyer, accountant and banker will be instrumental in conducting a thorough due diligence of the business you want to buy. Leave no rock unturned. There should be little-to-no surprises when buying an exiting business.
· Determine the type of business to buy.
Match your skill set and experience
· Evaluate the business
Sales Volume. Inventory. Quality of goods & services. Reputation. Licenses & permits
· Make the purchase.
Traditional business loan. Seller financing. Angel investors.
Of course, there’s no sure thing whether starting a business from scratch or buying an existing business. Be smart. Be patient. Be realistic.
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