There are so many paths to becoming an entrepreneur. One of the common struggles many face beforehand is deciding whether to start a business or buy instead. If you found yourself in this dilemma, then this episode is for you. Host, Domenic Rinaldi, goes solo to talk about the differences between starting and buying a business and what advantages the latter has over the other. He provides an outline of key things you need to consider in both, and, if you decide on buying, figure out what to look for. Tune into this episode for more details.
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Starting Versus Buying A Business: Which One Should You Choose?
I decided to do a solo episode to address the topic that is getting a ton of action these days. Should you start or buy a business? This topic has come front and center as so many people have been either laid off, furloughed, had their compensation totally restructured, or their future has become uncertain at best. In addition, there are a ton of businesses that have seen their revenues cut substantially, and they are scrambling to decide how best to compete in this post COVID world. Having helped thousands of people over the last two decades buy and sell businesses, as you can imagine, I have a strong bias to the start versus buy question. I will be outlining some of the key things you should consider when buying or starting a business.
I will also get into what makes for a good acquisition. As you can imagine, I’m often asked, “What are the hot businesses? If I were buying a business now, what would I be looking for?” I will provide you some detailed answers to these questions so you can start formulating where you would focus your business buying efforts. If you want to avoid common deal pitfalls and the risk of losing substantial dollars, you need to know how ready you are to buy a business. Because I believe that proper preparation is so critical to your deal success, we’ve published several free resources to help you be better prepared. You can access these resources on our website at K2Adviser.com/resources. Being prepared is critical to ensuring that you maximize returns and minimize risks.
We’re going to be talking about the merits of buying versing starting a business. If you’ve been watching the news at all, you’ve noticed that business startups were at a record high this past quarter, and that’s no surprise. Many people are scrambling to replace incomes that they’ve lost completely or partially, or to figure out how to get ahead of what might be a furlough or layoff. We’re at a critical juncture right now where people are having to decide what to do with their futures. I thought this topic was timely. I’ve been helping people buy and sell businesses for almost two decades. I’ve seen both sides of it. I’ve seen people starting businesses and I’ve seen people buy existing businesses.
Benefits Of Owning A Business
Time and time again, when I see somebody buy the right business for them, something that had a track record, where they can analyze and see what the historical performance of the business is, who the clients are, what the future of the business might hold, they have a good shot at obtaining success. Whereas if you’re starting something from scratch, unless it’s a side hustle because you’ve got a job and you’re looking to generate a few dollars on the side, you’re taking a big gamble starting from scratch. I’m going to get into some of those statistics to better illustrate what the risks are. Business ownership can give you a path to financial and personal freedom. It’s clearly not for everyone, but if you’re going down this path, you wouldn’t want to miss this episode. I promise to deliver you a ton of information that you can reference back to when you start your search for buying a business.
What are the benefits of owning a business? You have the opportunity to create personal financial freedom for you and your family. It also allows you to catch your breath and not worry about losing your job or being furloughed. I’ve seen many people buy a business and have their quality of lives improved dramatically. You’re not following somebody else’s schedule. You don’t have to be on a plane if you don’t want to. You don’t have to do business with certain clients if you choose not to and you can build something that has future value that’s potentially far greater than your initial investment. You have an operation that you can transfer to either the next generation or to a third one. You have a way to build a legacy that you can leave for future generations.Business ownership can give you a path to financial and personal freedom. Click To Tweet
Merits Of Buying A Business
Lastly, to people who own a business, and you’re looking to diversify or grow geographically, or simply add more revenues without the risk of making investments that you don’t know are going to return dollars, buying a business is a great way to do that. This episode is all about the merits of buying versus starting a business. If you buy a business, what should you be looking for? Unless you’re looking to start a small side hustle and generate a few shekels for my money, buying a business is a way safer bet. Why do I say this? It’s easy when you compare it to the perils of starting a business. For example, did you know that over 50% of all startups fail within three years and most don’t survive past five years? The most staggering statistic is that over 95% of all startups fail to generate more than $1 million in annual revenues.
Some of you might be thinking, “$1 million, that’s a lot of money.” Maybe, but that’s not $1 million in your pocket. You will have substantial expenses to generate that $1 million year in and year out. Your actual take-home pay might be little, or you might not even breakeven. The other fallacy about starting a business, again, unless it’s a side hustle, is that it will be much cheaper to start. That’s not the case either. If you’re starting a business and you’re trying to replace an income, you still have to pay living expenses and you’ll need to invest in that business in lots of ways. With the statistics that I stated earlier of the failure rates, you may never turn a profit. Hopefully I’ve caught your attention, but let’s address some of the biggest concerns I hear from people who were thinking about buying a business and thinking that it might be out of reach.
The first is, “It’s going to cost some significant dollars.” That’s true, but did you know that for as little as 10% you can buy a business? What do I mean by that? If you buy a business that’s worth $2 million, for as little as $200,000, you can buy that $2 million business that’s hopefully generating substantial profits. Many people don’t understand how they can acquire businesses with little money down and apply leverage to the business while it generates an income for them, it services the loan that they had to take out to buy the business and minimizes their risks.
The other thing I hear is that, “If something goes bad, you can lose your entire investment.” That may be true but if you have a business that has historical performance and it’s generating decent revenues and decent profits, if something goes wrong, you have the opportunity to recalibrate the business. Scale it back. You have revenues and profits to play with. Even if things go bad, it’s not like you’re starting from scratch. You should have something of substance that you can recalibrate and make it fit for whatever the situation is. The other thing I hear is, “I don’t know where to start. I’m not sure what type of business to acquire,” and so many other things. These are legitimate concerns, which is why my mantra is you need to be prepared do you need to do your homework before you even start searching for business, which is one of the reasons we’ve built so many free resources on our website.
One of the most important resources is our business readiness assessment. It enables you in less than five minutes to understand how prepared you are to buy a business and where your gaps are and what you need to address. I would strongly urge if you haven’t taken this assessment, go to our website. It’ll take you less than five minutes. You’ll get the results immediately. We’ll email you all the information and you’ll have a tremendous amount of information about how ready you are. Thus far, I’ve addressed the significant shortcomings of starting a business and why business ownership can put you on the path to personal and financial freedom. Why do I believe that buying an existing business is not only more prudent, but a safer way to deploy your capital or use your life savings? Here’s why. When you buy an existing business, you get all of the following things and maybe much more, depending on the type of business that you buy.
First, you get existing revenues and profits, and these are revenues and profits that you can go back and review on a 3, 5, 10-year basis. You’ll be able to model out what the business has done in the past so that you can predict what the future might hold. Imagine comparing that to having to build pro forma financials on a business that you’re starting. You’re starting off with a blank piece of paper, and I’ve never seen a pro forma financial that comes to fruition. It’s a bunch of guesses. Whereas if you buy an existing business that has revenues and profits, you’ve got something that now you can show and model out into the future. Not only that, but with the profits, it’ll allow you to pay yourself a salary and service the debt that you’re going to have to take on to buy the business if you decide to take on debt.
The other thing is you get trained employees. I always say the employees are a business’ most valuable assets. Think about walking into a business where people have been with that business for 5, 10, 15 years, and all the knowledge that they have and all that information that’s going to transfer to you compared to you starting a business and it’s probably you. When you buy an existing business, you also get existing clients, and you can look at all of that information from those clients. How sticky are the clients? How long do the clients stay in the business? What are the margins that they generate? Are there different types of clients? You should be able to get vendor relationships that transfer over to you and they should be longstanding vendor relationships and you don’t have to start from scratch.
You won’t have to provide some debt structure or down payment to secure those vendor relationships. You get an established brand and hopefully the brand is a good brand. This is where diligence comes in, but you’re going to get an established brand that’s known in the marketplace. You should get real infrastructure, have marketing and marketing programs, be able to look and see what have those marketing programs yielded to the business in the past. When you start a business, you’re trying all sorts of things and it can cost you lots of money to start all those marketing programs. Here you can evaluate what the business has done and what’s worked and what hasn’t worked. Information technology, hopefully the business has a good IT infrastructure, something that you can take and leverage and maybe improve upon, or maybe it’s a tremendous IT infrastructure and you have that to build on.
Whereas again, if you’re starting from scratch, you need to build that out. You might even have to build custom software to run the type of business that you’re looking to start. Human resources programs and there’s so many more things that you get when you buy an existing business. The business might have patents. You would be buying those patents. There are so many value pieces that you get when you buy an existing business versus when you start something from scratch. It is imperative however, then when you buy something, that it’s suited for you and you take care to perform the proper due diligence. I will tell you, after helping people buy and sell businesses for several decades, there is no perfect business. If you’re looking for a perfect your business, this might sound harsh, but you should probably keep your job.
It doesn’t exist. I’ve been doing this a long time and I’ve yet to see one, but here’s the good news, I would argue you don’t need a perfect business and you don’t want a perfect business. If you found one, think about how hard it would be to improve and grow that business. You want a business with some warts. The warts are your opportunity to grow that business. This is also where due diligence plays a key role. I’m going to cover due diligence in a future episode, because it’s so important, but you need to confirm that none of the warts are material or structural. If they are, it might not be the right business. You might have to skip this one and move on to the next one. That’s why diligence is such a key component of any acquisition. Conversely, if the warts are something you can improve upon with your skills and your knowledge, then this could be the perfect business for you.If you're looking for a perfect business, you should probably keep your job. Click To Tweet
Real-Life Stories Of Success In Buying A Business
If you can acquire it at the right price, with the right terms and conditions, it might be a business you could take to the next level pretty easily. Why am I so confident about this? I can cite client after client who acquired a business and was able to grow it and secure their personal and financial freedom. I know this to my core because I was a buyer myself and I’ve done exactly what I teach other people to do. I was in transition many years ago and I considered all of my options. I decided that continuing in my corporate career was not in my heart. It was time for me to build my own personal wealth and achieve my personal and financial freedom by owning a business. After looking for many months, I stumbled across this opportunity. I was networking and I found this business in Chicago. It was small, but it was the right fit for me.
I had a passion for deal making and after being frustrated with the quality of the businesses for sale on the market, I decided I could build a better mousetrap. Starting from scratch would have been difficult. Luckily, I met a group that had this business and many of the foundational things that I mentioned earlier. It had some warts, but I saw through those warts and I was confident in my ability to repair them and grow this business. Fast forward, we’ve built a multiple eight-figure firm and it solidified ourselves as one of the premier mergers and acquisitions firms in the US. It took lots of hard work, but we’ve survived two major recessions and we have a business that consistently outperforms for our clients. As a result, we’ve solidified our position. I know personally what it takes, and I love Helping other people chase their dreams of financial and personal freedom or business diversification through acquisition.
Let me share another story. I heard this and it resonated with me. Several years ago, we helped a client acquire a technology business. The business was in a bit of disrepair, but it had a solid foundation and the ability to be grown with some care and feeding. I had the opportunity to talk with the client who bought that business. It was no surprise, even during the pandemic, the businesses grown over 300% and it’s well on a path to double again. Best of all, the client has retired all of the loans they took out and now the business operates completely debt-free. The client’s in a tremendous position. They have a lot of cash either they can take as income or take some of it as income and plow back in the business to grow even faster. It’s a great story. I want to throw out a word of caution and I want to avoid painting too rosy of a picture.
Types Of Business To Acquire
Business ownership is hard, and it has a lot of inherent risks, but with the proper preparation and the right advisory team, you can get ahead of and minimize most of those risks. Hopefully, I’ve at least made the case that you should consider the option of acquiring a business versus starting one. Let me get to the second part of this episode which is, what types of businesses should you focus on acquiring? It’s a tough question to answer because it’s such a personal question. Everybody has different interests, different skillsets, but I do have some guidance that I can offer here. First, I tell everyone to focus on a business that they have a passion for and then focus on businesses where they can transfer their skills and knowledge so that they can move the needle on that business in the future.
The next thing I tell folks is to carefully analyze the business’ value drivers. Value drivers are those things that drive value of the business either up or down. If you had two businesses in the same industry, generating the same amount of revenues and profits, providing same products and services, you might have two businesses that have completely different values based on how they’re being run. I know a lot of people like to look at revenues and profits and think you can apply one metric and all of those businesses are worth the same. It’s not true. Here are some of the things that differentiate one business from another, whether it’s in the same industry or not. First, does the business have recurring revenues? I can’t tell you how important recurring revenues are. Recurring revenues are revenues that you know are going to be there month in and month out.
I’m not talking about repeat business. Repeat business is when you know clients are going to come back and buy from you time and time again. Recurring revenue is different in the sense that you are going to get revenues in some set period of time consistently. Usually, it’s a monthly basis from the same set of clients. To the extent of business has recurring revenue, I promise you the value of that business goes up dramatically. If you identify a business and you see where you can easily implement recurring revenue into the business model, here’s a perfect example of where you can take a business to the next level. The next thing are barriers to entry. How easy is it for new competitors to enter that marketplace? As you can imagine, the easier it is to enter the business and that market, the lower, the value of that business. Maybe I’m going to think twice about whether or not I want to be in that marketplace or that industry.
The other thing I’m looking at are the financials. How clean are they? Are the profit and loss statements clean? Do they show the true picture of what the business is generating in the way of revenues and profits? If they are, I promise you it’s going to be much easier to get that business financed through a bank. If they’re not, it’s going to get a bit tricky and I might not be interested in a business like that. What kind of cash is required to operate the business? The more cash you have to spend to generate a new dollar or revenue, the less appealing that business is to me. I love businesses where you don’t have to deploy a lot of dollars to generate revenue. These are some of the value drivers.
This is an important topic, a topic that I’m going to come back to in a separate episode. There are probably 10 to 12 value drivers that matter in every business. The things that I look for when I’m trying to decide is, is this the right business for me or my client? The other things that I look at that are not specific to any one business, but could impact value or more importantly, my willingness to even acquire that business. First, does the business compete with Amazon, Google or any of the other tech giants? Probably enough said, but I’m going to expound upon this. If I come across a business and I know they’re having to compete with any of these tech giants, I’m running the other way. There’s nobody I’ve met that has pockets deep enough to compete with those folks.
If you have to eke out money, revenues and profits and know you have to compete against any of those tech giants, you’re going to be in a tough spot. Unless you think you can niche the business down so much that you can mitigate any of the threats from those big tech giants, but I don’t see that often. The other thing I look at is can the product or services easily be outsourced or offshored at a price point that would make it impossible to make a decent profit. This is so important because if you think whatever the service or the product is that’s being offered can be offshored over to China or Vietnam or Malaysia or India, you could find yourself a year or two down the road scrambling to remake your business because it’s difficult to compete with some of the price points and the cost structure that exists overseas.
This are two examples and the point that I would make here is this is where it’s important to surround yourself with the right advisory team. Right advisory team will help you avoid all of the potential pitfalls and the risks of maybe losing your entire investment. I hope this has helped your thinking around buying a business as a means to achieving personal and financial freedom. If you would like to reach out and learn more about how we can help you in your business ownership journey, please fill out the contact form on our website and we will be back in touch with you. I hope you enjoyed this episode. If you enjoyed our content. please remember to subscribe and review our show. I look forward to the next episode. Until then, remember that scaling, acquiring or selling a business takes time, preparation and the proper knowledge.
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