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Costs are Relative in Start Ups Versus Acquisitions
SOURCE: Green Bay Press Gazette November 9, 2008
By: Scott Bushkie, CBI, M&AMI
Some would-be entrepreneurs believe they’ll be better off starting a business than buying one. But costs are relative.
In most cases, it’s safer to buy an existing business because you are buying existing cash flow. That cash flow allows you to take a salary, invest back into the business, and pay down debt over a three- to 10-year period.
That sounds a lot more comfortable than the alternative – often years without a salary and a 45 to 55 percent chance you’ll close your doors within five years.
Buying a going operation significantly mitigates the risk, although both options have risks with personal guarantees normally attached to buying:
Proven concept. With a start-up, you’re launching a concept that hasn’t been proven—at least not in your market by you. You’re working from projections and plans that may not come to fruition.
People. Through acquisition, you gain proven human capital. Key staffers know their roles and can help you grow the business. Starting your own, you have to figure out which roles you need filled, interview people, and hope you make the right decisions.
Mistakes. A prior owner has learned from his or her mistakes. Like when a software company comes out with a new operating system, you don’t necessarily want to be the first person to buy it. After a while they’ll tweak it and put some patches on it, and by the time you purchase it, it’s better than when it first came out.
Mentoring. When you buy a business, you almost always benefit from a transition period in which the seller consults with you and guides you through operations. When starting on your own, you typically don’t have that coach. You don’t have someone who’s been in the business day in and day out, forged the right relationships, and figured out the best way to get things done.
Assurance. Although the banks have tightened lending, that’s an advantage to today’s buyers. When the banks aren’t lending as much, the seller holds more financing for a portion of the purchase price.
The seller has a financial interest in the business’s ongoing success, and that provides added assurance the company has been accurately represented. And the seller will be looking out for your best interest because he or she wants to get paid.
Legacy. It’s not just current conditions that have sellers taking a vested interest in their companies’ future. Many sellers don’t want to take their money and walk away. They are looking for buyers with the best chance for success.
Most sellers are interested in taking care of their employees and leaving a legacy. They want the business to grow and thrive, so their employees still have jobs and so that, years from now, they can look back on the operation with pride and think, "I once owned that."
Bushkie is President of Cornerstone Business Services, Inc. a lower-middle-market M&A firm serving the Midwest. Contact him at (920) 436-9890 or sbushkie@cornerstone-business.com.
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