Quit your job, take a great idea to the masses and chart your own path to success -- there's no doubt that the notion of starting a business can be alluring to anyone with an entrepreneurial spirit. But in reality, creating something that will actually get traction and prove to be lucrative is never an easy thing. And often it doesn't work at all. Instead, sometimes the better bet is to buy a business which is already established.
That's according to Blake Hutchison, CEO of Australian-based Flippa, a platform for buying and selling businesses with more than 40 employees working in San Francisco, Austin, Baltimore, Barcelona, Manila and Melbourne. While he's admittedly biased toward the notion of buying rather than creating a startup, plenty of people appear to agree with his philosophy. Since 2009, more than 260,000 businesses have been sold on the platform, which has been used by more than 120,000 buyers.
Here are his thoughts on when it's better to buy a business rather than starting one from scratch.
1. Briefly, when is it smarter to buy a business instead of starting one from scratch?
It's smarter to buy a business when you can imagine yourself or business partners adding incremental value. Rather than enduring the pain of setup and the cost of growth, find something which has a history of performance, matches your preferences and can benefit from your knowhow. In this case, there's serious potential upside. Typically, a business that is worth buying is a business that has established traction. You're then in a position to optimize from there.
2. How does one properly vet a company's finances?
We always recommend you ask for the income tax return for every year of operation. In addition, ask for the current year profit and loss statement. Take both to an accountant, analyze each revenue and cost line and ask probing questions. Also asking to see overall marketing budgets can also give you a better feel of the business.
3. Why do you suggest looking at marketing budgets?
Simply, you want to know where money is being spent and how effective it is. Ensure you get a full breakdown of where the business currently advertises and what is and isn't performing. This analysis can reveal many things. Critically you may actually discover that a particular channel has been very ineffective. As a new owner this is a good thing, it offers leverage, this is where you can improve the efficiency of spend, save more and make more.
4. What if you're lacking funds to buy a business? Are there any smart options?
There's never been a better time to buy a business. There are many ways to access capital. You can pursue an SBA loan or take a look at ROBS (Rollover for Business Startups), where you can invest retirement funds from a 401(k) or IRA for the purposes of acquiring a business. In the case of ROBS it's not actually a loan. There's no debt or interest payments to make. Additionally, be creative with your offer. Try seller financing, where you offer a partial amount upfront and then the remainder paid over an agreed period of time subject to repayments at an agreed interest rate. There's mutual benefit for buyers and sellers but in your case, you'll have less to pay upfront and you may therefore be able to absorb a higher acquisition price.
5. If a business is profitable, what are the most common reasons the owners would want to sell?
There are many reasons but it is typically for personal reasons. Business owners either have fallen out of love with their business, have other projects they are working on or are simply looking to cash out as a means to reinvest elsewhere. Each situation is different but business ownership is all-consuming. To find a buyer equally passionate who can invest new energy is in many cases the most strategic thing a business owner can do.
6. Other than financial problems, what kinds of hazards does a potential buyer need to look for?
Don't be fooled into thinking running the business is as easy as the existing business owner maintains. The reality is there will be an incubation and onboarding period. If someone says it takes x hours to run the business, double it. Outside that, always look for and ask for advertising-to-sales ratio. You don't want to be too dependent on one channel.
7. Is there any way to ascertain brand equity?
In the small business space that is a tricky one. Net Promoter Score (NPS) will give you a read on the strength of the brand. Good tools for measuring NPS include Promoter.io and SurveyMonkey. I would also always look at customer reviews as a measure of the strength of the brand and product. Finally, you can fall in love with a particular brand but a new brand is often unlikely to have any equity so if brand strength is something you are looking for, we would always recommend looking for businesses older than three years old.
8. How do you suggest researching the competitive landscape?
First, do some keyword analysis to see what competitors are bidding on. This will give you some sense of how dense the marketing environment looks. You will have to go beyond that though. Set up Google Alerts for your industry to see who is doing what, ask your customers directly where else they buy, why they buy and how they perceive you against their other alternatives. This will give you valuable insight and from there you can begin watching competitive movements. Don't be too obsessed though. Unless it is a winner-takes-all market or you are offering something super niche there tends to be room for everyone. Execution is the number one thing you should be obsessed with.
9. What should you require the seller to do in terms of transitioning the company's leadership?
Transitioning staff is a key piece of the negotiation and due-diligence process. Who is coming? Who is going? What are their respective skillsets and what do you need to be successful? Ask the seller to outline what each person does in the company and how critical they are to the day-to-day operations. If important, have discussions with each of these people before taking control of the business. Finally, always lock-up the seller (have them work for the company) for a period of time. Depending on the sophistication of the business this may differ. In some cases, 30 days may be fine while in others you may need a six to 12-month lock-up.
10. Is there a certain sweet spot when it comes to the best size company to buy?
Each buyer is different. Budget is the biggest factor. If you can afford it, go for a more mature company, something three-plus years old with established traction. From this vantage point, you can better understand what works and what doesn't, where you can drive efficiency and where you should reinvest.
11. Are weird niches the best thing to consider buying?
Defensibility is a good thing to look for and something in a boring or niche industry can be very wise choices. For comparison, the fashion industry is highly competitive, yet the death care industry is huge and, at least as it relates to e-commerce far less competitive. And with a niche, you often have obsessive customers as there are few alternatives.