(This column originally appeared in the Daily Herald)
Over the past few years an unprecedented number of new business applications have been filed. Clearly, there are many Americans who want to be entrepreneurs and for a myriad reasons. Whatever your reason, it’s possible that you’ve also dreamed about becoming your own boss. If that’s the case, you might want to think hard about not starting a new business. Instead, consider buying one.
Why? Because starting from scratch is costly. And risky. And takes a long time. Buying an existing business can get you to your goal much quicker.
First — and with all due respect — it’s unlikely you’re coming up with truly unique idea. Sure, there are the Ubers and the Netflix’s and the OpenAI’s and a handful of other outliers which introduced products and services that have been world-changing. But 99% of startups aren’t like that — they’re coffee places, pizza shops, restaurants, distributors, service firms, small manufacturers. There’s already millions of these types of business in place. So why re-create the wheel?
The buy/sell market for existing businesses is very active already, and it’s expected to significantly grow over the next few years. That’s because of demographics. Today, 18.9% of the U.S. population is age 65 or older. Over the next few decades the Census Bureau projects that share will reach 29.1%. Already, according to the Small Business Administration, the average age of the U.S. small business is about 55 (and probably older since this number was compiled a few years ago). Exiting their business is high on their minds.
In a report from the business brokerage marketplace provider BizBuySell Max Friar, who brokers business sales at the Michigan-based firm of Calder Capital said: “I’m very bullish. Closings are picking up. The silver tsunami remains a trickle, however, the boomers can’t wait forever. It’s coming.”
Buying from an existing business owner means taking over something already exists, rather than building something from scratch. There are buildings and property, machines, equipment, technologies, processes, procedures, policies and — most importantly — employees who come with knowledge and experience. An existing business has already been in operation, hopefully for a long time, with built in customers, suppliers and partners. You can use its existing brand or, over time, build a new brand with new products and services.
If you’re younger and have aspirations of business ownership than time is on your side. I know a number of people who, instead of outright buying a business, decided instead to work for the business for a couple of years with an agreement with the owner of a potential future sale. This way you can get experience and really understand how the business works, all while drawing a salary. if you can pull off this arrangement … do it.
This is not a new idea. Mark Agnew and Brian O’Connor, adjunct professors of entrepreneurship at Chicago Booth School of the University of Chicago wrote in 2021 that “while these MBA graduates traditionally would be starting their own businesses, many are now considering bringing their talents to small and midsize businesses. Their education gives them cutting-edge knowledge about innovation, and they’re using it to catapult forward the businesses they join. They come armed with capital, deep and strategic networks from the prestigious institutions where they have earned their degrees, and a good amount of hustle and grit.”
What about financing? Buying an existing business helps to solve that challenge too. Rates are up and establishing credit can be challenging, particularly for a new business startup with no history. But that’s not as much the case for an established business. When you buy a business, a bank is more favorable toward providing financing because there are real assets to collateralize — buildings, inventory, receivables — and a financial history to measure debt service. And if you don’t want to go the bank route, there are a number of existing business owners who are very open toward seller financing which is an option you’re not going to have if you’re an early stage company.
“Seller financing has become an important tool for completing transactions, particularly when buyers and sellers have different valuation expectations,” said Jason Ward of TruView Business Advisors in the same BizBuySell report. “Even a modest seller note can strengthen SBA-financed transactions, improve buyer confidence, and reduce the amount of equity required at closing. In today’s market, seller financing is less about necessity and more about creating flexibility and aligning interests to get deals across the finish line.”
There’s also a real opportunity, given today’s economic environment. Some small businesses are struggling, which could make for an enticing opportunity for the would-be buyer. According to BizBuySell, 63% of business owners say inflation is not easing, while 48% report business disruptions related to higher fuel and energy costs following the U.S.-Iran conflict. Some of these businesses could be overvalued. At the very least, some of these business owners may find themselves just wanting to move on.
“One of the biggest reasons Entrepreneurship Through Acquisition (ETA) is attractive is that it represents lower risk,” wrote David Schonthal, a clinical professor of strategy and director of entrepreneurship programs at Chicago’s Northwestern University’s Kellogg School of Management.” Not surprisingly, buying an existing business that has already achieved product-market fit and recurring revenue is a safer bet than wading into uncharted waters with a startup.”
Schonthal also notes that, with “ETA you can likely pay yourself a reasonable salary immediately — rather than waiting years with a startup — and reinvest in the business from existing cash flows rather than outside capital or personal savings.”
Starting up a business sounds cool and sexy. But you may want to consider putting your ego aside. Buy an existing business and turn it into your own thing.
