Buy.  Start. Buy. Start.  hmmmm....

What should you choose?  How do you know?

Independent contractors, working for someone else, have minimal risks and limited up front investment and overhead costs.  On the other hand, leverage is where true wealth lies.  Without the ability to leverage the work of an employee base, the returns are limited by your capacity to work.  

How hard do you want to work?  

Starting a business of your own can have great rewards,  but the risk is significantly higher, with more pitfalls, upfront costs, and unknowns. The only other option is to buy an existing business and really build it to its potential.

The risk-to-reward ratio is tipped in your favor when you purchase an existing business.   Purchasing an existing business reduces an entrepreneur’s risk and creates opportunities for profit.  When you buy a business, you take a calculated risk that reduces pitfalls and therefore there is less potential for failure.  Here are some reasons why:

• Proven Concept.   Buying an established business is less risky – process or concept works.  Financing a purchase is often easier than securing funding for a start-up business for that very reason—the business has a track record.  A bank will be able to look at the historical results for the business, not just rely on projections.  

• Brand. You’re buying a brand name.  The on-going benefits of any marketing or networking the prior owner has done will transfer to you.  When you have an established name in the business community, it’s easier to place cold calls and attract new business than with an unproven start up.  That’s an intangible benefit that’s difficult to put a price on.

• Relationships. With the purchase of an existing business, you will also be buying an existing customer base and vendor base that took years to build.  It’s very common for the seller to stay on and transition with the business for a short time to transfer those relationships to the buyer. 

• Focus.  When you buy a business, you can start working immediately and focus on improving and growing the business immediately.  The seller has already laid the foundation and taken care of the time-consuming, tedious start up work.  Starting a new business means spending a lot of time and money on basic items like computers, telephones, furniture and policies that don’t directly generate cash flow.

• People. In an acquisition, one of the most valuable and important assets you’re buying is the people.  It took the seller time to find those employees, develop them and assimilate them into the company culture. With the right team in place, just about anything is possible and you will have an easier time implementing growth strategies.  Plus, with trained people in place you will have more liberty to take vacation, spend time with family, or work on other business ventures.  When start-up owners and independent contractors go on vacation, the business goes too.

• Cash flow. Typically, a sale is structured so you can cover the debt service, take a reasonable salary, and have some left over to take the business to the next level.  Start up owners, on the other hand, often “starve” at first.  Some experts say start-ups aren’t expected to make money for the first three years.

• Risk.  Even with all these advantages, some entrepreneurs believe it is cheaper, and therefore less risky, to start a business than to buy one.  But risk is relative.  A buyer may pay $1 million, for example, for an established business with strong cash flows of approximately $200,000 to $300,000.  A lending institution funds the transaction because historical revenues show the cash flow can support the purchase price.  For many people, however, that is far less risky than taking out a $300,000 loan with an unproven concept and projections that may or may not be realized.