Entrepreneurship. Startup. These are buzzwords for many Americans that aspire to start a business of their own—and there are indeed many.
In fact, the 2016 Kaufman Index on Startup Activity reported that 550,000 new businesses are started every month in America.
The trend shows no signs of slowing, but the traditional path to accomplishing the entrepreneurial dream is beginning to shift. These days, an increasing number of would-be entrepreneurs are buying their way into business ownership, opting to acquire and run an existing business rather than build from the ground up.
And it’s no wonder. Buying your way into entrepreneurship can be an appealing option and mitigate many of the risks of “growing your own,” when it comes to launching a business. Sticking your neck out to secure the startup capital, hiring the right employees, and establishing cash flow are just a few of the risks that send would-be entrepreneurs running away from the idea of starting their own business.
Buying an established business, on the other hand, comes with the potential benefit of instant growth and the ability to avoid the initial growing pains that often plague startups. Furthermore, taking the reins of an already established and stable business can offer more personal freedom as opposed to the seemingly never-ending time and personal commitment that starting from scratch typically requires.
“There are a lot of people who consider themselves fixers and developers,” Columbia Business School Adjunct Professor Timothy Bovard, who teaches Entrepreneurship Through Acquisition said in an article on the school’s site. “You can also be an entrepreneur by acquiring someone else’s company and making it better—growing sales and increasing profitability—as an equity-owning CEO. And the financial returns can be very appealing.”
Should you acquire a business instead of building it from scratch?
If you’re looking at the acquisition path to entrepreneurship, what do you need to know? Here are some of the things you’ll want to consider before jumping into the role of business owner and operator.
1. What type of business do you want to own?
Narrowing down the exact type of business you want to acquire is the first step. But identifying the business you think want to be in doesn’t necessarily mean it will be a good fit for you. It’s important to be realistic and honest with yourself about the personal attributes, strengths, and weaknesses you bring to the table. You can even do a SWOT analysis on yourself to identify those if you have trouble identifying them at first.
First and foremost, running any type of business will require the ability to manage others, make decisions, and possess an understanding of finances and what makes a business profitable.
Once you’ve narrowed down your industry focus, you’ll need to identify the best places to look for potential opportunities and how to vet them. There will likely be no shortage of prospects, so you’ll need to know ahead of time how you’re going to compare and contrast them.
One effective way to do this is by asking the current business owner for their business plan if one exists. Developing a one-page business plan of your own for each of the businesses you’re considering can be an effective vetting tool as well. This will help you nail down your ideas for operating the business, including what competitive advantage you’ll bring to the market and what your management team will look like.
It’s also a good idea to seek personal and professional referrals, ask the advice of business brokers, or do your own personal outreach. This will help you hone in on the best and most lucrative options.
When evaluating specific businesses, it’s a good idea to consider these important factors:
- Is the business established and is there an existing customer/client base?
- Is the business profitable with healthy revenues and cash flow?
- Are the ownership and business demands a good fit for your lifestyle?
If these three criteria aren’t in place, you may not end up reaping the benefits you envisioned. For example, if the demands aren’t a good fit for your lifestyle and the job requires more hours and effort than you have to devote, maybe it’s not a good fit. Conversely, you may realize that the benefits of making more sacrifices in terms of personal time and commitment will be well worth it in the long run.
2. Are you ready to learn and devote adequate time?
During your search for the perfect entrepreneurial opportunity, you’ll have to quickly learn about unfamiliar companies and industries and make sure you do some preliminary market analysis. Even when you’ve narrowed your search, you’ll have to learn about the specific company or companies that make your list.
In your role as CEO, you’ll need to develop expertise in many areas of the business. You’ll have to seek knowledge and recognize what areas you need to dive deeper into in order to learn more. You’ll also need to recognize professional weaknesses in order to quickly hire positions to bolster those areas where you may be lacking.
A thorough search can take a minimum of six months, and up to several years. In addition to the time required to learn about your industry and narrow your pool of companies, it will take significant time to find investors and raise funds, or to secure self-financing. Don’t rush into a decision or let emotion or the desire to fulfill an entrepreneurial dream force you into buying a business that isn’t a good fit. Once all of the above is in place, it can take another couple of months to hire the necessary legal and tax professionals and perform the due diligence necessary before signing on the dotted line.
3. Are you ready to be in charge?
Acquisition entrepreneurship means you’ll hit the ground running. This is a stark difference from traditional entrepreneurship, where owners tend to “grow up” with their business, easing into its nuances and demands along the way, and bringing on team members one at a time.
In the acquisition scenario, you’re immediately in charge. This means running the business and managing any existing employees from day one.
The early days of ownership will likely be fraught with some anxiety among existing employees who will be wondering about their future with the company, or if they’ll even have one. Inevitably, there will be employees that will not remain with the company long-term as you—or they—realize that they are not a good fit for the direction you ultimately take your new company. Still, the early days are for determining this and many other things. It’s especially important to exercise finesse with existing employees and help to ease their minds during the transition in ownership.
4. How will you set yourself apart from other potential buyers?
If you’ve found a business that is truly successful, a good fit for your skills and lifestyle, and that is for sale, you won’t be the only interested buyer. It’s also important to remember that a successful business owner probably doesn’t need the sale.
So if it’s not a numbers game, how will you set yourself apart as the best buyer for this successful business? You’ll need to persuade the seller that you’re the right buyer.
Often this comes down to showing that you care about and believe in the business itself. If it comes down to you, someone who believes in the culture and values of the existing business and infrastructure, and another buyer that is immediately looking to overhaul the business and change its culture, you may have an advantage. This, of course, depends on the mindset of the seller.
Buying your way into entrepreneurship can be just as personally and monetarily rewarding as starting your own business from scratch. Just remember to vet your options, consider your own temperament, and above all, don’t rush it.
By doing your research, learning all you can about your new industry, and working with the right mix of professionals to find, vet, and complete your due diligence on a company, you can take part in the dream of entrepreneurship through buying an existing business.