Buying a business over starting a business

Today, entrepreneurial trends seem to favour new business developments—those flashy businesses, built from the ground up, that innovate advanced products and provide unique services—ranging from information technology companies to lifestyle brands, local retail shops and more.

While the prospect of starting a new and original business is enticing for many entrepreneurs, it’s all the riskier. In such a highly saturated and competitive enterprise market, creating an original business, with a strategy that points towards a successful and long-lasting enterprise, is a sure and lengthy gamble.

But, you’re an entrepreneur who wants to own a business. You’re ready to pursue a professional path that allows you to utilize your managerial expertise, invest recent financial gain and grow personal capital and skills. What are your options for kick-starting your entrepreneurial drive? Can you own a business without launching it from the beginning?

The answer is yes, and Village Wellth knows the solution—we’re here to tell you that there is extraordinary value in using your drive to buy a pre-existing business.

Why Buy a Pre-existing Small to Medium Business Over Starting a New One?

To reiterate the advice from Harvard Business School professors Richard S. Ruback and

Royce Yudkoff, “buying an existing, enduringly profitable business is less risky,” than investing in a start-up. It’s “not riskless, but much safer because the product or service is already established…” 

When entrepreneurs develop new businesses, they make considerable personal and financial sacrifices. Owners of start-up businesses commit extensive time, money and labour to their companies without any guarantee of when or how their business will generate profit and show growth. Deciphering a product or service alone takes years to conceptualize; building a management and inventory system is tedious; shaping a brand and marketing strategy is all-consuming.

On the other hand, as bestselling author of Buy Then Build, Walker Diebel argues,

“Many successful small businesses have been operating for decades. This means their model for success was developed a long time ago and many of these businesses could benefit from the fresh approach and skillset of the next generation of entrepreneurs.

Buy first to innovate your business later."

For the next several years, the owners of these businesses, the baby boomers, will enter retirement. It’s estimated, “some 72% of business owners intend to exit their business within the next decade, with over $1.5 trillion worth of business assets to be transferred to a new generation of business owners.”

This economic transition means that a huge supply of reputable businesses for purchase is on the horizon. This is exciting for entrepreneurs because purchasing a pre-existing business equates to fast access to capital, resources and profitability. Taking over an established business allows you to decide your career path, from what role you’ll play in your established company to how you’ll build and adapt your enterprise in the future.

Here are the 5 main reasons why you should buy a pre-existing business.

The Proven Platform

Wealth

Financing Options

Market Awareness

Reduced Risk

The Proven Platform— Why start from scratch when you don’t have to? Instead, inherit an established customer base, team, business plan and operation. 

Crafting a viable business plan is one of the most challenging tasks of business entrepreneurship.

When you purchase a business, you acquire its strategic plans and operational strategy. Further, you take on the business’ namesake, reputation and cash flow.

Business buyers inherit both tangible assets and intangible assets through acquisition. Acquiring assets deters the exponential costs, financial and timewise, that go into amassing resources for new precarious businesses.

Tangible assets include physical property such as brick and mortar real estate, inventory and equipment. Intangible assets include non-material property such as branding, social media, websites, licenses and more.

Above all, buyers take on that company’s goodwill—otherwise known as the elements that make the business advance like a loyal customer base, skilled management and employee team, developed system database and more.

Wealth— Why spend money when you can make money? By selecting an acquisition target with a solid sales and profits history, you can collect a salary as an owner immediately after acquisition. 

Owners of new start-up businesses tend to put a lot of money upfront to initiate their endeavours, many of whom don’t end up seeing a return on their investment until years after their businesses launch.

According to a recent survey conducted by the BDC, 46% of small to mid-sized enterprises (SMEs) that “acquired one or more business over the last 10 years said their revenue growth was outpacing their industry average, compared to 38% of SMEs that did not acquire another business.” 

By purchasing a financially healthy business, entrepreneurs acquire pre-existing cash flow. This instant profit offsets debt-servicing. With a foundation and accumulating profit in place, as a new owner, you have the freedom to decide how to balance your operations, work and life—making strides to advance your personal career growth and the growth of your company.

Financing Options — Do you want options for gaining access to capital? The assets of the company you buy can be used to help secure the financing needed for acquisition. 

While business acquisition might seem expensive, it can be more financially attainable to purchase a business than it is to start one due to the financing options available for buyers.

Buyers typically acquire businesses with a mixed financing approach through a combination of cash payment, loans from the bank and seller financing. Banks provide significant loans based on the valued assets and reputation of a target business.

Investors are more likely to provide buyers with financial lending when they recognize the value of the acquisition. Funding acquisitions of already established businesses means more security and better return on their investments.

A financing tactic unique to business acquisition is vendor debt—business sellers are often willing to lend buyers a portion of the purchase cost to secure a transaction. This financing can supply the funds needed to move forward with an acquisition.

With flexible and accessible financing options, acquisition entrepreneurs are typically able to afford businesses with more impressive costs and equities than they might assume based on their cash savings.

Market Awareness — Are you wanting to expand into a new industry or geographic location? Business acquisition allows you to expand into areas where you might lack contacts and knowledge.

According to the BDC, “entrepreneurs that acquire other businesses do so to grow.” BDC’s 2019 survey, which questioned over 1000 Canadian business owners, found that 41% of business buyers acquired to increase their market share; 24% looked to add a new business line; 21% worked to relocate geographically to expand their consumer reach. 

Purchasing a pre-existing business allows an entrepreneur to diversify their professional path. Entrepreneurs who want to redirect their niche get the chance to research and enter new industries. In diverging from their given field, they broaden their expertise and build networks in new markets.

During the acquisition process, a buyer connects with 7 or more professional advisors—lawyers, accountants, lenders, vendors and so on—and, in the process, builds an invaluable network of industry contacts. Once a buyer has acquired a business, such networks provide a foundation for the buyer to pursue further acquisitions. Many acquisition entrepreneurs grow their enterprises by acquiring additional businesses or by merging companies—yet again, diversifying their industry experience and growing their company through reaching new geographic locations and consumer bases.

Reduced Risk — Why assume major risk when it’s not necessary? According to the BDC, only half of Canadian start-ups still operate after 5 years of business. When the time comes for you to sell your acquired business, you’ll reap the reward of your initial investment at a multiple.

Small Business BC states that “buying an existing successful business is by far one of the fastest, most cost effective, and least risky ways to be in control of your financial future.” 

As Walker Diebel points out, “a start-up is considered one of the risky investments around...the infrastructure, proof of concept, product-market fit and revenue all need to be built from zero. That translates as any return to an investor is unlikely.”

Start-ups assume more than just financial risks; new businesses push potentially unsuccessful products or services out to market. Likewise, as Forbes suggests, when starting new ventures, entrepreneurs assume the risk of a failed business because they don’t pay attention to the minutiae of business operations. 

Pre-existing businesses have the data—financial statements, inventory lists, customer databases, operational strategies and so on—to prove their years of reputable success and management.

With stable operational infrastructures, pre-existing businesses give entrepreneurs the foundation to focus on innovation and growth over daily operations. New owners use their time and effort to advance a business’ worth, setting things up for a prosperous return in the future.

Pursue Acquisition and Become a Business Owner

Village Wellth makes the decision to buy—and the process of buying a business— simple. “Buying a business is a strategy to fast forward your entrepreneurial journey.” 

The benefits of business buying are sweeping, but business acquisition doesn’t come without its challenges. Knowing the process of acquisition and understanding the effort involved in the transition of ownership is crucial for the success of entrepreneurs.

Here at Village Wellth, our mission is to educate, prepare and equip buyers with the resources and knowledge they need to pursue a winning acquisition. Village Wellth provides you with tools to plan your acquisition and connects you with trusted advisors to fortify your credibility as a buyer. By delivering training and guidance, we steer you towards your height of success, so you can become the business owner you aspire to be.