7 Factors to Consider When Starting vs. Buying a Business
The COVID-19 pandemic forced thousands of business owners to change their business models, and companies that adapted have survived. Operating a business post-pandemic presents challenges and opportunities, which differ by industry.
If you’re weighing the options of starting vs. buying a business, there’s a great deal to consider. Both decisions require a large financial investment, and a big time commitment.
A business broker can help you assess the pros and cons of each decision, and guide you through the process of purchasing a business.
Here are seven factors to evaluate when starting vs. buying a business:
1. Factors that Drive Business Value
If a buyer has expertise in a particular industry, the purchaser may focus on businesses in that industry. Other buyers look for a high performing company, regardless of the industry. To find an attractive business, think about the factors that make a business valuable.
Brand Awareness and Competitive Differentiation
How well known is the company, and do consumers view the firm’s products and services as different from the competition?
For example, a McDonald’s franchise has high brand awareness, and franchisees pay a premium for the McDonald’s name. However, customers may not view McDonald’s differently than other fast food businesses. If four different restaurants are located at the same highway exit, customers may not choose McDonald’s over the competition.
Growing Sales, Consistent Profits, Strong Cash Inflows
Growing sales and generating a profit is important, but buyers also value steady cash inflows. If the business collects cash quickly, it can finance operations without the need to borrow funds.
Recurring Revenue Streams
Companies that generate repeat business, particularly using a subscription model, are more profitable, and offer a buyer more predictability.
According to the Harvard Business Review: “Depending on which study you believe, and what industry you’re in, acquiring a new customer is anywhere from five to 25 times more expensive than retaining an existing one.” With recurring revenue, the business can spend more marketing dollars on finding new customers, and spend less on retaining existing clients.
A business that performs well in these categories is an attractive investment.
2. Filling a Unique Customer Need
You may start a business to meet a customer need that isn’t being addressed by competitors. If you have industry experience in a particular niche, you may identify a need in that niche, and provide a solution. Niche businesses get to know their customers in depth, and are more likely to uncover a need.
Let’s assume that you work in the home fitness industry. Millions of people have changed to home workouts, and may continue this trend moving forward. Peloton and Mirror have thrived by providing home fitness products during the pandemic.
If you have industry knowledge and can fill a need, you might consider starting a business, rather than a company purchase.
3. Lower Capital Investment
If you can start a business with a low amount of capital, you have less at risk. A lower capital requirement can make starting a business more attractive.
Ecommerce firms, for example, sell products directly to consumers, without the need for physical store locations. An ecommerce business makes a bigger investment in technology, and there is still the cost to inventory products and fulfill orders.
When less capital is required, you can recover the cost of your investment faster.
4. Purchase and Improve a Business
You may purchase a business and make changes to improve results. Many successful companies have areas where they can improve, and if you can identify those areas, you’ll own a more valuable business. Here are some examples:
Reduce dependence on the owner: Train your staff and give them more responsibility, so that the business is less dependent on the owner’s involvement.
Document procedures: Many profitable companies can operate more efficiently by documenting how they do business. Create a procedures manual that documents each routine task, so you can eliminate confusion and help the staff work more productively.
You can also automate more tasks, and increase training to get better results. Finding a profitable business that you can improve may be a better option than starting from scratch.
5. Opportunity for Post-Pandemic Growth
Some companies are well-positioned to grow after the pandemic, and they may be attractive investments. Cybersecurity firms are a great example, because firms must put controls in place to protect data used by remote workers.
A large percentage of workers may never return to the office full time, and remote work presents cybersecurity challenges. Find a business that is ready to grow as the pandemic winds down.
6. Selling More Products to the Same Customer Base
Businesses can increase sales and profits by selling more products to the same customer base. Food and consumer packaging companies accomplish this by adding to existing brands. If you use Tide laundry soap, Procter & Gamble may entice you to buy new versions of Tide. Campbell’s Soup adds new products for the same reason.
If you can buy a business and invest capital to add more products, you may be able to increase sales and profits.
7. Evaluate Your Personal Situation
Don’t forget to assess your personal situation, which includes your business experience, age, and financial status.
A former executive nearing retirement age may want to use personal assets to buy a business. They have the available capital, and want to invest in a proven business model. On the other hand, a younger person with good ideas and less capital may start a business and build it over time.
You have a number of factors to consider, and your decision has a big personal and financial impact. The business brokers at Raincatcher have worked on thousands of business transactions in dozens of industries.
Work with a business valuation and brokerage expert today so you can make a more informed business decision.