Is Starting a Business Better than Buying an Existing One?

Entrepreneurs have great ideas every day. We know those that succeed are largely a function of a founder’s desire and zeal to see the idea through to its ultimate profitability, and to see growth of a company as a never ending proposition.

But what about the hard part – just getting the idea off the ground and running; making that first dollar of revenue; putting all the organizational pieces in place, like forming the entity, deciding on the allocation of ownership interests, creating an HR department, bringing on an employee, or two, or 10; obtaining licenses for the business; leasing or buying a place for operations, etc. etc. Oh yeah, and there’s also the problem of getting the capital it takes to make this happen, and keep the founder functioning along the way.

There are so many decisions – and difficult steps – that go along with the formation of a new business, it’s easy for the entrepreneur to stop and ponder the question, how do I ever get from the idea to actual operation? yet we know thousands of companies do exactly that every year, some of them with extraordinary success.

In other posts, we’ll take a look at the “bootstrapping” process and how some startups have navigated the process successfully themselves. But here, our focus is different. Is there another way – that sometimes, if not always, works out for the better.

Ideas have to be generated – created or birthed, if you will. But that happens within a very large context – the context of “everything”. The world of everything includes ideas that are a whole lot like you own idea, sometimes almost identical. Sometimes they aren’t really that close to your idea, and sometimes even if they are, it’s better to start off with your own, because identity provides context and meaning.

But it can also be true that starting from scratch may not always be the answer – in fact, in some cases, it might be overrated.

Think of the analogy of buying a home. What’s better – to build a new home or buy an existing one? Even in the best year for new homebuilders, less than 20% of all new home acquisitions are of new homes. And when a new home is purchased, a significant majority of them are built according to someone else’s plan – they are bought as designed and really not “built from scratch”.

But when it comes to the great business idea, as hard as entrepreneurs work at a startup, very few take the time to look at the marketplace of what is already there. No doubt there are a couple of assumptions which underly that neglect: (1) that if there is a business enough like what we want to do, it isn’t for sale, and (2) it’s not within my reach to finance an acquisition.

The first assumption may or may not be true depending on what business idea you’re pursuing. But don’t write it off too quickly. The second assumption is really just a myth waiting for you to figure out the truth and allay your fear. Let’s take a look at both and see how you might move beyond these assumptions and enable yourself to skip ahead to operating and growing your dream business instead of trying to seat it into existence.

With respect tot he first, the key is the kind of business you’re thinking of. A great example of something you might be able to buy would be any small manufacturing business. Your idea is to sell covers for various electronic devices in different ways than you see them encased presently. So where there are hard shell covers for for protection of cell phones and there are wallet style covers – there is little available that does both. You also want to add value in terms of the styling you make available. Through research, you find that there is truly no manufacturer making exactly what you propose.

But there are existing companies using all the materials, with all of the various phone dimensions – all they need is to combine your ideas and add design features you have in mind.

Starting this company from ground zero will be expensive, time consuming and risky. But if you negotiate a dealt to buy all or even part (the particular manufacturing part) of an existing business, you can come money ahead and do it in a lot less time than you thought.

Finding the business you’re looking for and approaching them for acquisition is not easy. But it can be done. It’s really wise to engage an agent or attorney to delve into the company and negotiate for the business on your behalf. We help our clients by not only finding and opening the conversations with existing business owners, but nailing down the right price to pay, the financing, and the specific terms by which the acquisition will take place. Of course, one of the most important terms is always to prevent or avoid competition from the party you just bought from, and so we devote considerable time to ensuring you have protected territory, ramp up time and customer relationship channels to allow you to succeed from day one. This is really a much better prospect, where the business is right, than starting up your own company with no revenue, staff or history to work from.

Financing is the other key issue. Thanks to numerous grant programs as well as SBA lending options, money is readily available today for the purchase of an enterprise when it is viable. This is especially true where seller financing makes up part of the deal. And seller financing has the benefits of keeping the past owner(s) close to the business, while making them a lender instead of a partner. We’ll address that issue more in future installments concerning acquisitions of a business.

The bottom line is you just might be closer to getting your grand idea to market than you would have thought. Before pushing too hard on startup activities, at least give your self the benefit of considering an acquisition.

Landmark-FLA can assist you in the process. We have 27 years experience working with entrepreneurs and business owners in the transition of a business. If we can assist you, please reach out to us today at (317) 564-4976 or by email to: andrew@fla21.com.

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Landmark Advisors

Landmark Advisors