3 reasons to buy a business
Very often when we think about ‘an entrepreneur’ we visualise someone who assumes great risk by starting a business in the hope of making a return. But does an entrepreneur have to actually ‘start’ a business to qualify as one?
Many out there make the mistake of assuming that every entrepreneur is someone who came up with an idea, raised money from investors and grew the business into a success.
However, there are many entrepreneurs who buy an existing business and not start one from scratch. Here are 3 good reasons why it may be better to buy a business instead of starting one.
1. A PROVEN BUSINESS MODEL
When you start a business from scratch you need to contend with the very tough challenge of proving that your good idea is also a good business idea. The two do not always follow. Very often innovations are as a result of some problem that an entrepreneur puts his heart and soul into solving. The more important the problem, the higher the chances that customers will pay for the solution. That’s the theory. It doesn’t always work out that way in the real world. Very often entrepreneurs spend millions of Rands pursuing a business idea that customers just couldn’t be bothered about parting with money to solve.
To the contrary, if you are buying an existing business, you don’t have to go through this.
The existing business has already proven that the product or service is important enough to customers, that they are willing to exchange hard currency for it – year in and year out. You also don’t have to come up with any idea. It’s already there right in front of you, along with satisfied customers and a proven business model. Yes, you may change a few things like introducing better technology, or better systems, or improving the product in some way. It is much easier to transform a business that’s less profitable to become more profitable, as opposed to starting a profitable business from scratch.
2. EASIER TO RAISE CAPITAL
In the romantic image of an entrepreneur, people assume that once you’ve cracked the big idea, there are angel investors and venture capitalists climbing over each other to fund you, and of course, you instantly become a dollar billionaire. Wake up, you are dreaming!
The reality is that the hardest money you will ever raise as a businessperson, is at the early stages of your business. Why? Because it’s too hard for anyone to believe you. People are worried whether they will ever see their money again, let alone earn dividends and see returns. Why? Because, there is no track record. There are no customers. There is no finished product. No matter how good it may be, all you have is an idea. That is why the investors at this stage are called “Family, Friends and Fools”.
Now consider buying a business. You immediately get a track record. There are audited financial statements. There is a bank account that’s seen money come and go over many years. Sometimes there are contracts that will last for years to come from customers, essentially saying “we will pay you this amount of money every month, if you continue to give us your product or service”.
When buying a business, you literally have everything you don’t have when starting one.
Therefore, banks are willing and able to fund you when buying a business as opposed to starting one. This does not only apply to the capital you need to buy the business, but also to working capital you may need to grow and improve the business you just acquired.
3. GOOD REPUTATION IN THE MARKET
One of the most important things startups need to build is a brand. And that is not easy especially when you first need to get from idea to business, all at the same time trying to convince customers to buy a product or service they’ve never heard of.
Often, when buying a business, you are also buying a reputation. This reputation or brand is often built over many years of servicing loyal customers. This goodwill is extremely valuable since you are starting with some market share and can now build from an existing foundation.
Of course, not all businesses out there have a good reputation, but that’s not necessarily a bad thing. You may find a business that’s a great business, but it’s done something that’s dented it’s reputation in some shape or form.
Let’s say for example, you are buying a restaurant that’s known for great food, but horrible service of late. This may mean a history of good loyal customers but in recent times there has been poor turnover because of the service issue. Well, buying it on the cheap, because of this poor reputation, and repackaging it with you as the owner and operator may land you a gem that’s just gone through a few bruises that you can clean up and reintroduce to customers, and make a quick turn on your investment. Putting up the “under new management” sign, retaining the great chef and communicating a fresh new look and feel may very well bring back the loyal customers of old – all after negotiating the sellers down on price.
For this and many other reasons, buying a business may be a better option for you than starting one.
Article by Andile Khumalo