Why would you start a business when you could buy one, or at least many of the core components you will need, at a lower cost than starting from scratch? You wouldn’t, but most entrepreneurs still do. If at all possible, you shouldn’t start a business from scratch…you should buy one. This is also true of growing a business. It is easier, faster and less expensive to grow through acquisition than by internal development (in most cases).
A buy vs. build strategy will save most entrepreneurs years of work and hundreds of thousands of dollars. Too many founders have a tendency to reinvent the wheel. “But my idea is insanely original, nothing like it exists!” they bellow. Not likely.
While the product or service might be novel, or the business strategy unique, the underlying components upon which all good businesses are built already exist. Certainly, the customers, supply chain, partners, distribution channels, operational systems, and talent needed to start or expand a successful business, already exist. A smart entrepreneur will look for an opportunity to acquire and integrate some or all of these components, rather than find them one at a time, or build them from scratch. They do this by acquiring a turnkey business, usually a distressed one.
This is one of the dynamics I envy about today’s entrepreneurs. There has never been a better environment to acquire, operate and grow a successful enterprise. There are so many incredible innovations sitting fallow or underutilized. The infrastructure to deploy them has already been created. Sometimes all it takes is a small tweak to the business model, new leadership, or pivoting to an adjacent market, to take a nascent technology, undersold product, or struggling business, and make it wildly successful.
By contrast, when I started my various hardware-software-Internet ventures, there were few like it. No sophisticated development stacks, no hosted services, no content management systems, no social media, no mobile devices, and precious few PC’s running anything except a handful of applications. There was no tech talent, no distribution channels, and no global marketplace. Everything had to be created from scratch — and man was it expensive and labor intensive. What I paid $1M for to develop in 1999 can be “acquired” today for less than $100,000 – and it would function 10X better.
One of the most important principles of good business is leverage. An entrepreneur that knows how to leverage the assets that have already been created by others – usually at considerable expense and trial-and-error – will triumph over the entrepreneur who tries to recreate those assets from scratch. The advantages of buying a business (or the assets and intellectual property), rather than starting and inventing from scratch, are many:
- Acquiring an established business (and brand) is far more likely to succeed than that of a pure startup. For example, 80% of franchised businesses are successful, whereas 90% of businesses started from scratch fail within three years.
- More than 300,000 new patents were issued last year – an historical high. The cost to file and prosecute a simple patent with just a few claims is about $25,000, and takes 18-24 months to get issued. Only about HALF of all patents filed even get issued. The odds are better playing Russian Roulette. Yet, many of these patents are sitting in universities waiting to be licensed, or on corporate balance sheets waiting to be spun out. They are assets that can be acquired for a fraction of the cost and time of inventing and filing anew.
- The biggest cost of starting and running a business is usually the people – recruiting them, training them, and retaining them. Most existing businesses already have a knowledgeable and trained team in place. That’s why many corporations buy companies…for their teams (Acqui-hiring). Smart entrepreneurs who are running young companies can play this game too.
- The Cost to Acquire a customer for a new business is many times higher than that of an established business. Whether B2B or B2C, a new business has to create a sales pipeline from scratch. In most businesses, the cost of marketing is 10%-15% of revenue. In a new business, the cost of marketing is exponentially higher.
- In addition to gaining marketing efficiencies, an existing business can leverage its sales, customer testimonials, affiliate partnerships, and referenceable accounts, to establish better lines of credit and better terms with its supply chain. A new business has to create that history, awareness and reputation from scratch, usually over several years. They pay a premium for lines of credit and vendor relationships.
- One of the most challenging aspects of building a profitable business is to scale it without imploding. An existing business has at least some of the necessary systems and processes in place. A new business has to implement scalable infrastructure from scratch – a very time consuming effort and usually hit-and-miss in the early stages of its life cycle. With an existing business, there is often some hard-won experience with what works and what doesn’t across all departments.
- Finally, financing the acquisition of an existing business is MUCH easier than raising capital to start a new one from scratch. In most cases, the owners/investors will help finance the sale by carrying a note or taking an earn out. There are lenders who specialize in financing the purchase of an existing business…. and, trust me…, they are a lot easier to deal with than angel investors and venture capitalists. Plus, you don’t have to give up equity in your company.
Whether you are looking for a turnkey business, or most of the components needed to run the business you have in mind, think about buying a business rather than starting one from scratch. The next ten years will see the largest transfer of businesses and wealth in the history of the world. The baby boomers are retiring and GenX and GenY are ascending to their peak earning years. More than 10 million businesses will change hands. Grab yourself one of them!