Buying A Business VS Starting One From Scratch. What Is The Best Option?
Those who are entrepreneurial, hard-working, and want to make a bigger impact in the world of business will jump into the startup world and cut their teeth launching their own business. What startup founders don’t realize is that 70% of startups will fail between years two through five and have a 10% chance of failure within their first year. Across the board, 90% of startups will fail within fifteen years of opening their doors. These statistics are bleak for anyone looking to build a business from the ground up. This is because a startup has more factors working against it than an already established business.
As a business owner, there are several challenges and key factors to consider when choosing between starting a new business or purchasing an existing one.
Most people envision starting a business as coming up with a new business idea or product and having complete control over their brand. It can be incredibly satisfying, and you'll always feel proud of yourself for doing it all by yourself. However, there are a lot of things working against you as a startup founder. Entrepreneurship affords you the freedom of being able to be your own boss, but it also requires a lot of hard work to continuously grow your business.
But what if you were told that there is a way you could limit the chance of business failure? The way that entrepreneurs can mitigate this risk is by Entrepreneurship through Acquisition (ETA.)
What is ETA? ETA is an entrepreneurial model that allows someone with the entrepreneurial skillset and drive to own a business by buying and growing an established business.
Below are four reasons why ETA is a better business model than starting a business from scratch.
REASON NUMBER ONE: IT’S EASIER
This is a no-brainer when it comes to buying a business. That’s not to say that buying a business doesn’t have its own set of challenges. Think of starting a business from scratch as a mountain climber starting at the bottom of a mountain. But, when an entrepreneur decides to buy an already established business in a field that he is passionate about or has an interest in, he already has a leg up compared to the hiker at the bottom of the mountain. The entrepreneur that decides to buy a business is starting halfway up the mountain instead of at the bottom. An established business will usually have a customer base, procedures, recurring revenue, and industry market share that will give the Acquisition Entrepreneur an edge.
It is also easier to raise money as a business buyer for an established business because creditors and investors are investing in more than just an idea, they are investing in intangible assets that a startup may not have a lot of yet.
REASON NUMBER TWO: CASH FLOW
“Never take your eyes off the cash flow because it’s the lifeblood of business” -Richard Branson
The famous saying “Cash is King” still rings true today. If your company is unable to produce sustainable revenue you will soon no longer have a business. According to CBInsights, the second-largest reason startups fail is, simply put, running out of funding or personal money. Money is the “lifeblood of business,” and if you can’t generate revenue fast enough you will soon run out of funds to support your operations.
The benefit of buying a business is that you don’t have to build a sustainable revenue generation model for your business from the ground up – all the while having to deal with all the other stresses that accompany starting a business. By buying an established business you can get access to cash flow immediately upon acquisition.
Cash flow is the most important factor when deciding whether to invest in a business. A new business will not have it, and an existing business will. Startup investments require an upfront investment with zero initial returns. Think about how much time it might take for your business to become profitable and how you will be able to sustain yourself until then. On the other hand, though, a business worth buying has existing cash flow that will allow you to focus on scaling the company rather than just keeping it alive.
REASON NUMBER THREE: LOW-INTEREST RATE ENVIRONMENT
The low-interest-rate environment worldwide has made it easier for private equity firms, family offices, and entrepreneurs that pursue buying a business to get access to capital to undertake business acquisitions and leveraged buyouts. From 1971 to the present, the historical average interest rate is 5.47%. Since the beginning of the 2008 recession, rates have stayed close to zero for more than half that time.
This low-interest-rate environment has enabled private equity firms and entrepreneurs to tap into enormous amounts of funding. According to McKinsey, dry powder (cash committed by investors) has grown nearly 17% annually since 2015. Reaching a record of $1.81 trillion in January 2022. The amount of committed capital to acquire private business demonstrates that investors are hungry for their money to work for them in this historically low-interest-rate environment.
REASON NUMBER FOUR: THE GREAT SALE HAS BEGAN
The vast majority of businesses are owned by the Baby Boomer Generation in the US. There are currently over twelve million businesses owned by this generation and many of their owners do not have an exit plan. A survey conducted by Wilmington Trust found that only 58% of business owners have a succession plan. Many of these owners are looking for entrepreneurial individuals to take the reign of their business and steward the legacy of their company to its next generation of success.
Most Baby Boomer-owned companies are profitable, according to statistics from Guidant Financial.
According to estimates, there are 2.3 million current owners of businesses in the United States. These businesses collectively employ over 25 million people, many of these business owners are thriving, and nearly 60 percent don't have a succession or transition plan in mind.
The great sale that is currently happening will allow many opportunists to become business owners, and potentially acquire a business for sale that has a loyal customer base and track record of success.
If you are entrepreneurial and want to make a difference in the world of business, acquiring a business (or multiple) this decade could be the best business opportunity of your life. If you want to learn more about how to take advantage of the massive wealth transfer happing over the next decade; reach out to learn more about how iGOTHAM helps private equity firms, family offices, and Acquisition Entrepreneurs by deploying data and technology-driven investment strategies to shorten the time it takes to acquire a business.
iGOTHAM will soon be launching a community for Acquisition Entrepreneurs and CEOs, where they can network with each other, and pursue business acquisitions. If you would like to receive a free comprehensive due diligence checklist form, sign up for the waitlist at https://www.igotham.com/wait-list and send an email to firstname.lastname@example.org asking to receive iGOTHAM's due diligence checklist.
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