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To “Buy” or to “Start”, that’s the $64,000 Question?

Guest post by: Alan Brind

Article Overview: There’s no question that buying a going concern can have many advantages. If the company has a well-defined marketplace, an established business offers a sound platform to expand and further grow the business. It will have employees, customers, processes, a business model, cash flow, and inertia all in place. Further, it is easier to borrow from a bank when your company has a history and everything is a matter of record.

To “Buy” or to “Start”, that’s the $64,000 Question?

Frequently, we get asked by buyers, should I start up my own business or should I buy an established business. Easy question to ask, but the answer depends…let’s look at the pros and cons.

There’s no question that buying a going concern can have many advantages. If the company has a well-defined marketplace, an established business offers a sound platform to expand and further grow the business. It will have employees, customers, processes, a business model, cash flow, and inertia all in place. Further, it is easier to borrow from a bank when your company has a history and everything is a matter of record.

On the other hand, a start-up is a completely different animal and takes a different set of skills and knowledge to pull it off. You’re starting with a clean slate and imagination is required along with patience. If you have never done this before it can be a harrowing experience, as there is a plethora of details to wade through to bring your dream to a reality. But, it can be a rewarding experience for the creative entrepreneur, who may thrive on this sort of challenge.

Ultimately, it comes down to cost versus benefit, with a large dose of reality medicine. The first analysis is to ask the following key questions:

1. Do I have the skills, experience, knowledge and patience to start up a business?

2. What type of products or services do I want to sell?

3. What is the nature of the start-up and where should it be located?

4. What is the investment required to start up this business and where are those funds to come from?

Once you have answered these questions do a complete cost analysis, comparing estimated start-up costs with the acquisition costs, preferably of a business with similar profile, while forecasting which business would generate the best total return and higher profit margins. This of course is somewhat easier with a going concern, as you have factual information upon which to base your analysis. In the case of the start-up, it is less objective and more hypothetical.

If having a paycheck is a major consideration, then all the calculations in the world is not going to make much difference, as your objective can only be achieved with a pre-established company. When most people do the analysis, they realize how difficult and costly it is to start up a business from scratch and opt for a “buy” versus “build” decision.

The reason a start-up is generally riskier than an established business is the fact that it takes at least two to three years to break-even. Maintaining a steady cash-flow is often precarious, as a substantial amount of the owners time is spent building the customer base, a task a bit like trying to walk up a down escalator.

According to the U.S. Small Business Administration only 40+ percent of start-ups survive four years, which is rather starling news. Many other studies have shown at least nine out of ten start-ups not lasting beyond five years.

By now you must be asking, well I know many people who have started up their own business and have been successful. After all, the business I was contemplating buying was once a start up. Yes, that’s true, but it’s a matter of time and place, conditions are less conducive today for a startup company.

But still, there are still entrepreneurs out there with an ingenious idea and the know-how to execute it. Nothing will stop a person like this, regardless of logic or the outcome of a financial analysis.

That’s why it’s critical to compare the costs of buying versus starting up a business. Evaluate the asking price of the business you might be contemplating to determine if it’s a fair price. Spend worthwhile time with your CPA, your attorney and business broker before you commit to buying any business. Only then will you be armed with the knowledge to make an informed decision.

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Article Tags: buy or start a business, buying a business, selling a business



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