In many ways, starting and building a game-changing business is like writing the great American novel--it's possible to achieve, but the odds of getting it done are slim, at best. For every Mark Zuckerberg, there are thousands of startup entrepreneurs struggling to keep their companies afloat.
In fact, in the BizBuySell Guide to Buying A Small Business, author Ed Pendarvis notes that various studies by the SBA and Department of Commerce have shown that between 65 percent and 90 percent of startup businesses are no longer operating after 5 years. In fact, most startups fail in the first two years because they run out of money before they can generate a positive cash flow.
The problem isn't that startup business owners lack entrepreneurial abilities. It's that launching a successful small business can simply be much more difficult than buying an existing business with a proven track record and growth potential. Both Ray Kroc of McDonalds and Howard Schultz of Starbucks, for example, chose not to build their empires from scratch, but rather buy and grow an established business.
Advantages of Buying a Business
Some business scenarios make it difficult, if not impossible, to acquire an existing company. For example, entrepreneurs with a new and potentially disruptive product or service may find it necessary to build a company from the ground up.
But more often than not, existing businesses present greater opportunities and lower risks than startups. Here's why:
- Actual results vs. pro forma projections- Buyers of existing businesses benefit from actual financials rather than pro forma budgets, improving their ability to gauge future earnings and develop an accurate financial picture.
- Immediate and predictable cash flow--Successful companies provide cash flow from day one. After purchasing a successful business, the new owner can immediately rely on predictable revenue for operations, payroll, and debt service. It is not uncommon for start-ups to have to wait months to years before there is enough cash flow to cover these costs.
- Trained employees--Assuming the seller has done a good job in the area of employee retention, the buyer's ownership tenure begins with a trained and skilled workforce--a milestone that can take months to achieve as a startup entrepreneur.
- Established suppliers and credit lines--Don't underestimate the value of established suppliers and credit lines. With a solid supply chain, you can avoid the kinds of operational disruptions that damage customer relationships. You will also save on the time and effort that would be required to establish these relationships from scratch, and you may benefit from favorable terms negotiated by the previous owner.
- Existing customers and referral business--Healthy small businesses have a robust base of existing customers and referral business. Start-up businesses are difficult because you have to convince customers to stop buying from their usual places and come to your company. Most entrepreneurs underestimate how hard it is to change customer behavior.
- Licenses and permits--Licenses and permits often transfer to new owners. In industries where licenses are essential for operations (e.g. bars and restaurants), existing permits and licenses can shave weeks or even months off the launch cycle.
- Developed growth strategy--Many companies for sale have moved beyond the startup stage and have developed a plan for the next stage of growth. It's not uncommon for sellers to provide training to bring new owners up to speed on operations and the company's documented growth strategy.
- Easier financing -Unlike startups, existing companies have proven track records, enabling banks to base lending decisions on actual results--not hypotheticals. And for many entrepreneurs, the ability to obtain seller financing is essential for sealing the deal.
- Better work-life balance--Small business ownership is rarely a 9-5 type commitment. . But startups can be all consuming, so buying an existing business frequently results in a better work-life balance for the owner.
As an entrepreneur, you have a unique set of vocational objectives. But at the end of the day, your real goal is to own a successful small business to provide an income to you and your family, and build value in something that you own. The fastest and surest way to get there may involve buying an existing company, so don't overlook this option in your search.