Free Advice

Tim Johnstone is a seasoned executive who took advantage of a merger to pursue his dream of business ownership. Rather than starting a new business, Tim bought an existing business.

Why buy a business instead of start one? For Tim is has to do with his expertise. He says, “I am very good at managing cash flows and creating an efficient path from source of supply to customer need satisfaction.” I should add that Tim is an astute marketeer and had hundreds of people under his management.

People who have management skills tend to be business buyers. They can manage people, processes, systems and money. Their skills complement the entrepreneur who, as Tim says, “Takes joy in scratching for the first order, seeing it through to delivery and scratching for the second one, and so on.”

Scott Ecker started Enetics Networks in 1999. Scott is young, technologically savvy and full of energy. His comments echo Tim’s when he says, “What keeps me going in this business is every new client that calls. I love it when people come to me because of my reputation.” Scott’s business is a combination of traditional and high tech, as his firm provides technology support and service.

As Tim alluded to, entrepreneurs like the thrill of being first, the thrill of making big money or the recognition if successful (the recognition can even come with failure though).

Starting a business is similar to a political campaign. There’s a lot of passion and enthusiasm. There’s a feeling of changing the world. Of being on the cutting edge versus in the pack. This is especially true for dotcoms and other high tech start-ups.

On the other side, buying a business is usually faster, cheaper, safer and easier to finance. A business buyer takes over a customer base, cash flow, profit and proven systems – from day one (assuming the buyer acquires a profitable company). I will not discuss consolidations and roll-ups, as they are growth strategies not entrees into business.

Franchises sell on the theory that it is safer to buy a proven system, with qualified assistance. Think about that if you’re considering buying a business. What do you get when you buy a profitable, independent company? You get systems and proven methods of marketing, selling and operating. Instead of creating it yourself, you pay someone else for doing it. Unlike franchises, which are based on being easily duplicated, with an independent business you get the proven systems and a unique niche.

It takes 6-12 months to make a successful acquisition. This time period starts with defining criteria, continues through search, analysis, due diligence, deal structure and closure. Compare that to how long it takes most start-ups to make a profit (not a wage to the owner, but profit over and above the salary it would take to hire someone to do the owners job).

A business buyer will usually invest money equal to about two times the anticipated annual owner salary. The rest will be borrowed, either from the seller, family or a lending institution. The buyer often walks into a company with experienced staff and a manageable work week.

A start-up will invest money to buy equipment, inventory, etc. However, the true cost must also include forgone wages. The owner who left a salary plus benefits to start a business and work “free” for an extended time period has a true cost higher than just the cash outflow. We’re all familiar with the long hours put in by entrepreneurs.

High tech companies can be noticeably different than a traditional start-up. For the most part they are banking on their insight and cutting edge technology (the thrill mentioned above).

A company that supplies or supports the technology industry may experience stable, solid growth (no hockey stick growth charts here) and build value (because of profits) just like a low tech business. There is nothing wrong with this – as long as the founders recognize it.

Besides the thrill factor, why start a business if buying a mature, profitable company has so many more advantages?  The answer is potential. The potential of a start-up can be tremendous (as is the risk). It is extremely difficult for an acquisition to match the growth potential a cutting edge company has.

To summarize, start-ups thrive on the passion and enthusiasm of the founders.  We’re assuming the management (usually the owners) is competent and there is a market for the product or service.  (Don’t assume passion is enough because if the customers don’t share the passion and don’t buy the product or service the businesses will fail.) The vision, the thrill of creating and the marketplace potential are what drive many people to choose this course of action.

Business buyers may not have that passion for a particular product or service (or the vision to see the niche that needs filling) but they have a passion for business. Give them systems they can add value to and their enthusiasm takes off.

 The common factor is the drive to be successful. To produce a product or service, to make sales, to provide jobs and to achieve the financial and other rewards that define success.

© Copyright John Martinka 2001. All rights reserved.