11 May Buying a Business vs. Starting A Business
One of the most serious career choices you can make is whether you will be on the clock for someone else or work for yourself. But don’t be fooled: working for yourself doesn’t always mean starting a business. It’s not easy to come up with the right idea and the right amount of money to transform yourself into an entrepreneur overnight. There are a lot of people that want to be entrepreneurs (or so they think), but don’t know where to start.
Have you thought of the third option? Buying an existing business and being your own CEO. The fancy name for this is “entrepreneurship through acquisition.” And it’s been studied quite a lot by business schools across the country. I’ve been exploring acquisitions to grow my software development company, Agent Beta, rather than slowly growing it organically. I’ve also looked at purchasing existing businesses on Flippa to add diversity to my portfolio.
The smart acquisitive entrepreneur looks for a business that has endured and remained profitable. This is the kind of business that produces a steady and stable income — not a flash in the pan or a media buzz machine. It’s important to realize that a steady and solid business is just what bankers and equity investors like — the less risk to them, the better! The dull plodding business that brings in the cash each month is not rare — it’s just not publicized in a flashy way.
What makes a business solid?
Repeat customers, for one thing. A recurring customer base is essential to the continuing viability of any company. A rapidly expanding customer base is not a guarantee of long-term commitment. So don’t be fooled by it. Look for companies that have a core of loyal customers who come back for service and/or product month after month, year after year. It’s important to look at not just sales statistics of a company you’re thinking of buying, but at the individual customers — are they the same or do they change frequently? Frequent change in your customer base is a sign that the company has not yet found its real niche, and too much time, money and resources are being put into the search for Mr. Right.
The other thing to look for, strangely enough, is a slow growth pattern. Why? Because when you take over you don’t want to deal with the types of crises that come with too-fast growth — the inventory concerns, the customer-service problems, the shipping and warehousing and training and hiring hassles that quick growth always entails. That doesn’t mean you should buy a buggy whip company, one that has no possible future customer base.
According to founder of Simple Life Insure Ty Stewart, “You’re looking for something that has shown a steady growth pattern over the years and is producing a product or service that will continue to be in growing demand in the foreseeable future.”
Building up a company from scratch is a major risk and will entail loads of stress and long hard hours. You don’t start out with money, you have to go out and get it. You don’t start with a customer base, you’ve got to build it up from zero. There’s no trained and experienced staff ready to show you the ropes and keep things running smoothly while you get settled in.
Buying an established company, on the other hand, can mean you just need to tweak a few things here and there to have it running the way you want it to — and your bankers will love you for investing in something so safe and sound, instead of pursuing a dream that has no foundation and only middling chances of succeeding.
Originally posted on entrepreneur.com.