When you are looking to start a business or grow a business, the question sometimes comes down to whether to grow a business from scratch or buy a business. It’s a decision that has to be made about starting from the ground up or buying a base that you can build on.
There is no one answer to this question that is right for everyone.
You can, however, identify the factors that you should consider. In the main these are risk, time capital and your core skills.
Either option brings with it a risk. Starting from scratch with a business brings with it the risk that you cannot build critical mass to get past break-even point. A lot of businesses don’t make it past start-up stage. When you venture out this is the risk you take.
If you buy a business, you have that established base, but you have probably invested a lot more capital up front. Your risk is that you have paid too much or that you are not able to maintain the business at the level you acquired it at.
Most start-up businesses are racing against the clock. You need to get the business to break-even point before you run out of money to support it or the energy and enthusiasm to keep the business going when it is not providing a financial return. Very few start-ups have the luxury of taking their time to get things right.
The reality is that most small businesses are under capitalised. Buy a business and you should have immediate cash flow, but you require that initial capital to be able to buy in the first place.
Start from scratch and you’ll be funding the business while it gets to break-even. Most small business owners contribute sweat equity as capital in their business. Even with your own hard work as part of the equation, you are more than likely going to need some level of financial investment in most cases.
The most important one is your ability to grow the business: Sales, marketing and the ability to acquire customers are critical. You can be the best technician in the world in your field, you can have great financial skills but if you can’t grow and build the business you are in trouble.
Do a stocktake on yourself and the answer should become more obvious. If you don’t think you are good at building or growing a business then maybe having an initial business base makes good sense.
On the other hand, if you are a natural sales person and enjoy interacting with people, then it may be a smart idea to put those skills to work and save the money you would otherwise invest in buying a business.
When you pay for someone’s goodwill, in most cases you are buying their efforts to build a customer base and an income stream. If you can do this yourself within a reasonable time frame then you will save money.
Time and capital go hand in hand. Capital should save you the time and put an established business in place quickly. Without capital you will need to invest a lot more time to build a business. What is your timeframe? How quickly do you need to have critical mass in place?
If you are going to buy a business, the key is to buy smart. Make sure the business stacks up and is worth the asking price. There are probably more, lesser quality businesses on the market than good ones. Your accountant should be able to help you through this process. And, if you buy, try to build in some protection around the purchase.
Greg Hayes is a director of Hayes Knight and specialises in taxation and business planning advice.
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