Opinions expressed by Entrepreneur contributors are their own.
The process of starting a business from scratch can be very daunting and time-consuming. There are many things to consider, such as business structure, marketing, R&D/product development (if you’re creating something), raising capital, finance, legal matters, etc. One of the first things you need to look at when starting a business is simply the amount of money it’ll take to get the business off the ground. For many people, it can be difficult to come up with or raise the initial investment needed to start a business from scratch.
Let me be clear here, I’m not advocating against anyone starting a business or anyone building a new company at all. I’ve conceptualized at least 15 or so different business ideas and was able to bring a handful of them to life, although many didn’t get off the ground or even go to market for that matter.
I think all entrepreneurs, at some point in time, should get their hands dirty in creating something from scratch. I think most will probably conceptualize an idea or two that they want to take to market because it may be the next greatest “thing,” in their specific target marketplace, and they’ll have an awesome learning experience doing so — and some will inevitably achieve the success that they imagined they would.
The many benefits of buying a business
With that being said, though, I think that the notion of buying an existing business may be a much better option both from a fiscal responsibility standpoint (and pragmatically, for that matter). When you buy a business, you’re acquiring a customer base, established systems and processes, potential assets (physical and digital) and much, much more!
Another reason buying a business makes sense is that you can usually get it at a discount. This is because businesses often sell for less than their actual value, since the owner(s) may be motivated to sell quickly due to personal or financial reasons. And lastly, an existing business comes with an established reputation and goodwill, which can save you a lot of time and money in marketing and advertising costs.
These factors alone can give you a significant advantage over businesses that are starting from scratch. But the key to success in purchasing a business is finding “the right business” to purchase. It’s subjective, I know, but there are some general frameworks that you can use to guide you and aid in your journey to evaluating and eventually closing on your first business acquisition.
There are more businesses for sale today than there are buyers
As you may or may not know, businesses for sale have grown exponentially in the last decade. There are many reasons for this, including the current state of the economy, retirement and quite a few others.
Business owners are facing financial difficulties in some instances and are unable to continue operating their businesses. While it may not seem like a good thing, in a down economy, there is an opportunity for those looking to purchase a business. I’m not suggesting that it’s a time to take advantage of someone, but I am saying that you can acquire businesses for fair prices, in some cases, well under market value.
There’s a significant cohort of business owners who are about to enter or seeking to enter retirement. They may not have family members or children to pass their business on to, so in some cases, businesses simply go out of business or cease to exist. Herein lies an opportunity, for you, as someone seeking to become a business owner.
It’s easier for existing businesses to generate cash flow
Simply put, cash flow is the lifeblood of any business, big or small. It’s the money coming in and going out, and it needs to be managed carefully to ensure the business is healthy and profitable.
It is generally easier for an existing business to generate cash flow than for a startup business or brand-new company. This is because an existing business typically has revenue streams from customers and other sources, while a startup or new company may not yet have any of those things. An existing business should be generating income through existing channels or specific sources that it currently employs.
Increasing cash flow is just as important as reducing expenses when it comes to boosting profitability. A business can only grow if it has enough cash on hand to invest in new opportunities. Remember: Increasing cash flow is essential for long-term success in any business.
You’re purchasing a proven model
When you’re starting a business, one of the inevitable questions that you’ll be asking yourself is “How am I (or how are we) going to make money?” Fortunately, this isn’t necessarily one that you’re going to have to answer if you’re buying an existing business. Existing companies typically have proven revenue models. This means that they’ve successfully sold and continue to sell its products or services. The repeatability of this model is what you’re looking for when you’re purchasing a company.
A startup business, on the other hand, may not have a proven revenue model because it has not yet sold its products or services. This can be due to a variety of reasons, such as the company being new and therefore having no track record, or because the products or services are not yet ready for market. Either way, a lack of a proven revenue model can be a major obstacle for a startup business.
There are many reasons to buy an existing business instead of starting one from scratch. Perhaps (as I’ve mentioned), the most compelling reason is that you’re buying a proven business model. The riskiest part of starting a new business is figuring out whether your business model will actually work and be profitable. With an existing business, you know that the business model works and that the business can be profitable.
Hopefully, I’ve inspired you to jump-start your journey toward acquiring your first existing business! Remember, you need to completely educate yourself in business before you start trying to acquire them. There are inherent, built-in risks associated with business ownership that so many fail to recognize or understand. This isn’t meant to discourage you, it’s simply to let you know that the details really do matter in business, so don’t overlook them!