What makes an entrepreneur great has much more to do with what happens after their idea is born than how they come up with it in the first place. How do they turn their vision into a business? How do they develop their team? How do they generate sales and funds? And how do they adjust course with new information? That’s why buying and growing an existing business can be an excellent alternative way to become an entrepreneur, even if you don’t have that initial “aha” moment.
Why Buy An Existing Business?
An operating business’s concept has been proven out in some capacity. It should have initial traction with an existing customer base and revenue. It should have a solid reputation and at least a few reliable team members on board. It should have clear opportunities for growth.
Acquiring this type of business allows you to skip those very early stage steps: coming up with the idea and testing product-market fit, developing prototypes, closing that agonizing first sale, charging endless expenses on your credit card without knowing if you’ll generate the sales to pay off the bills, and more.
You can instead dive right into the work of improving and expanding the company, introducing new products or services, growing the team, investing in sales and marketing, developing a new website, working with new distribution partners, whatever opportunities exist for the business you’ve acquired. In other words, when you acquire a business you can be a growth-oriented entrepreneur with the foundation of a strong baseline company supporting your efforts.
Acquire a business that has been around for two years and you’ve significantly lowered your risk. An acquired business may be generating enough cash to pay you a salary from the get-go. This makes it a great option for those craving the role of running a business but who are not in the position to go without a salary or take on a mountain or risk. Additionally, if an existing business has assets and a strong cash flow, you can grow it through debt financing and maintain full ownership even as you invest in expansion.
How Do You Go About Buying A Business?
The first step is to outline what you are looking for in a business — your “investment framework.” We acquired EcoEnclose over two years ago after a three-year search and knew we were looking for several specific things. We sought a business we could acquire outright and own in its entirety, through the right combination of cash and financing. Many people take an alternate approach, seeking to take a minority ownership stake of a much larger business by bringing in outside investors to fund the deal.
Second, we were looking for a company whose values and mission aligned closely with our beliefs. Third was a strong preference for a company located in (or that could be relocated to) the Rocky Mountain region. Many people, on the other hand, begin a business search with a willingness to move anywhere for the perfect opportunity.
We were looking for a business that had a unique product or service offering, a strong brand, the ability to scale nationwide and even worldwide, a solid and growing set of customers and an owner/operator who had not yet been able to or was not interested in making the sales and marketing investments needed for rapid growth. Many people set different parameters here based on their unique skill sets and interests. Some look specifically for services businesses. Others look companies with clear opportunities for cost reduction and efficiencies.
Once you know your search parameters, log into business broker websites and start searching — a process that is not dissimilar to searching for real estate. Network with everyone you can, especially brokers and bankers, so they can connect you with businesses and opportunities that meet your framework. Reach out to businesses of interest and see if they are interested in selling.
How Much Does It Cost?
There are two parts to this question. The first: how much are businesses typically valued at? A typical rule of thumb is: Valuation = Seller’s Discretionary Earnings (SDE) X Industry Multiplier (typically between two and three) + additional assets you would acquire in the deal such as real estate or cash on hand. When you think about how much it will cost to buy the business, you also want to factor in any additional cash you’ll need to invest to grow the company.
The second part of this question is how much you actually have to pay. Many deals are structured with a combination of cash (which can come from you alone as the buyer or from yourself and a set of investors) and debt financing. Small Business Administration loans can be a great funding source for qualifying business. Additionally, sellers are often willing to finance a portion of the deal. Finally, an “earn out” to the seller can help create a more affordable pricing structure for you and a great incentive for the seller.
The bottom line is that most people who are interested in starting a business (which is typically a costly and investment heavy endeavor) could acquire a business instead by finding the company size and financing structure that aligns with their financial means.
Is buying a business more or less exciting and entrepreneurial than starting one from scratch? I’ve done both and both are exhilarating and endlessly challenging. But I’ve personally enjoyed my experience with EcoEnclose more than launching my own idea. We could engage directly with customers to find ways to improve our offering right away, which is one of my favorite aspects of running a business. We could immediately find time away from the daily grind and make major strategic decisions and changes. We inherited and got to learn from an incredible team, instead of having to fake it as experts early on.
The Young Entrepreneur Council (YEC) is an invite-only, fee-based organization comprised of the world’s most promising young entrepreneurs. In partnership with Citi, YEC recently launched BusinessCollective, a free virtual mentorship program that helps millions of entre…
Young Entrepreneur Council (YEC) is an invitation-only, fee-based organization comprised of the world’s most successful entrepreneurs 45 and younger. YEC members represent nearly every industry, generate billions of dollars in revenue each year and have created tens of th…