I researched and wrote this article about six months ago but never published it. Now, with the COVID-19 situation, even more Baby Boomers will be selling their existing businesses and retire. Why should you care? Because this could be a perfect storm opportunity for those people who want to be entrepreneurs/owners but don’t really know how to start a business or want the risk. The risk-to-reward ratio is tipped in your favor when you purchase an existing business. Starting a business of your own can pay great dividends, but it’s important to understand that the risks are significant. According to Michael Gerber, author of The E-Myth Revisited, 40% of new businesses fail in the first year, and 80% fail within five years. You might want to reduce your risk and leverage the small business shift being caused by the aging Baby Boomer population.
There is a trending tsunami of aging business owners getting out of their businesses right now. It’s no secret that the population of the United States is aging and demographics are shifting as 72 million Baby Boomers are approaching retirement. By some accounts, there are almost 28 million small business owners in the U.S., and many are owned by Baby Boomers who will soon be retiring. The challenge for these owners is what to do with their businesses.
Ideally, Gen-Xers and Millennials should be lining up to purchase these companies, or legions of sons, daughters, nieces or nephews should be standing by, ready to take over and keep the family tradition going. But that isn’t the reality and the scarcity of potential new owners is a big problem. It’s also a problem for American communities, which depend on their small business owners to provide jobs and create locally-rooted wealth. This could be the perfect opportunity for an entrepreneur-minded person to buy and grow an existing business.
Purchasing an existing business may reduce an entrepreneur’s risk while creating opportunities for tremendous profit. There are a number of benefits to consider in purchasing an existing business rather that starting one:
Proven business model. Buying an established business is less risky. As a buyer you already know the product or service works. Financing a purchase is often easier than securing funding for a start-up business for that very reason. The business has customers, revenue and profits.
Existing brand. When you buy a company, you’re also buying a brand name. The on-going benefits of any marketing the prior owner has done will transfer to you. When you have an established name in the business community, it’s easier to attract new business than with an unproven start up.
Existing 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 period of time to transfer those relationships to the buyer.
Narrow focus. When you buy a business, you can start focusing on improving and growing the business immediately. The previous owner has already laid the foundation and taken care of the time-consuming, tedious start-up work. Your focus can be on growing the business with new products and services or even just better marketing.
Experienced people. In an acquisition, one of the most valuable and important assets you are buying is the people. With the right team in place, just about anything is possible, and you will have an easier time implementing growth strategies. Make sure when you evaluate a business to meet and assess the key employees.
Revenue and cash flow. Typically, a sale is structured so you can cover the money you owe the previous owner, take a reasonable salary, and have some left over to take the business to the next level. Startup owners, on the other hand, often are “cash-starved” in the early days of a company. Some experts even say start-ups aren’t expected to make money for the first three years. Contrast that with a small business that is already making $ 3 million a year in revenue.
Reduction in 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 per year. A lending institution will fund that transaction because historical revenues shows the cash flow and profitability can support the purchase price.
The Baby Boomer business owners are retiring right now and for the next ten years. Investigate local small businesses in your city and see if it makes sense for you to acquire a company versus starting one.