Want to start a business? Why you should buy a business instead
As a serial entrepreneur, I start new businesses on a regular basis. However, over the years I've found that buying a business is often a more effective means of achieving entrepreneurial and financial goals.
If you are thinking about starting a business from scratch, I don't want to deter you from that. In fact, I have a comprehensive business plan guide that will walk you through the exacts steps to take.
However, if you are interested in running a business and are keen on surpassing the start-up phase, I've got a way that can put you on the fast track to success.
If approached mindfully, buying a business can offer a better return on your investment with less effort than building a business from the bottom up.
I believe so much in this approach from my own experience, that I recently became the owner of a studio called Concept Shop that develops unique online business concepts in profitable niches and sales them at an affordable price.
I'll tell you more about Concept Shop at the end of this guide (plus give you my exclusive discount), but first let's dive into the basics of buying a business.
Why you should buy a business
When you think of owning a business, what likely comes to your mind is the process of starting a business from scratch.
This involves coming up with a brand new idea, researching and vetting the idea, writing a business plan and then, finally, building and launching the idea.
I've started a dozen different busineses and know firsthand that here is a lot of time, energy and money that you must invest in getting them going.
The issue with starting anything from scratch is that you are investing a lot upfront for something that has a high likelihood of failure.
Even as a savvy strategist with an MBA from the top business school and 15 years of experience working with Fortune 500s, many of my business ideas have failed, particularly when I first started out as an entrepreneur.
I've come to accept this as an inherent feature of entrepreneurship, as only 5% of startups succeed, though over time I've improved my success rate significantly.
One of the secrets of success is figuring out ways to minimize the upfront investment while maximizing the potential return.
Buying a business requires an upfront purchase but allows you to skip the painful startup process.
And if you approach it carefully, you can be well on you way to realizing your entrepreneurial and financial dreams in a fraction of the time it would take if you built a business from scratch.
How to buy an existing business
There is roughly a 5-step process you should engage in when buying a business.
I caution you to follow all of these steps and be smart about how you approach this, as the biggest risk in buying a business is being scammed.
There are many companies and individuals out there peddling low-quality businesses that look great on the surface but are no more than duds.
This process helps you avoid ending up with a cubic zirconia when you were actually looking for a diamond.
The research phase is all about figuring out what type and size of business you want to buy.
In addition to determining the industry you want to play in (be it fashion, tech, wellness, and so on), you should also put some thought into the type of business model that is best suited for you.
In terms if the business size, this comes down to what you are prepared to invest vs. your expectations for future earnings.
When you start searching for businesses to buy you will come across two types.
Starter businesses are brand new and haven't started generating much revenue yet. As a result you can often buy these businesses at a significantly lower cost.
However, even if these businesses aren't earning money yet, you should still look for signs of value, for instance:
well-designed website or product
clear means of monetization
marketing strategy in place
some existing traffic or leads
Basically you want the starter business to have everything in place so you can just start running it immediately begin earning money sooner than later.
Seasoned businesses are earning revenue which means they will be much more expensive but easier to determine their value (which I'll explain in the evaluate section below).
Businesses for sale are available in many places different, but often times, the best are not aggressive advertised.
So you can start by making inquiries from other business owners in the industry you are interested in.
There are also websites that act as brokers or marketplaces for businesses:
Flippa is the largest and most popular business marketplace. The cons are that it's hard to sift through the massive number of listings to find jewels and many scammers lurk there.
1kprojects is a good site to find people selling side projects, many for only a couple thousand dollars or less. I've even bought and sold a couple of businesses from their site. The cons are that it doesn't have a large offering and caters more to tech-related concepts.
Empire Flippers is a business broker that sells premium, high-quality businesses making at least $1000 a month in verifiable income. The con is that this is not the place to search if you have a limited budget as their listing start at $30,000 and more.
As mentioned there is also my studio, Concept Shop, that fills a major gap in the business-for-sale space. I'll tell you more about it shortly.
Evaluating a business is both a qualitative and quantitative exercise. You want to take look at objective facts and figures about the business but also rely on your subjective judgement (trust your gut).
The preliminary calculation for a seasoned business is to simply take some markup times annual revenue. A good rule of thumb is a factor of 3-5x, so a business generating $100/month should cost between $3,500-6000.
However, the seller may set the price higher or lower depending on various factors so it's up to you to vet the business and try to negotiate to get the price you believe it'a worth.
For a starter website, the evaluation is more subjective as you don't have actual revenue to use as an input. Therefore, you need to make some assumptions about potential revenue.
You will need to understand the business model and monetization plan and then make some estimates.
For example, let’s say a starter business includes a product priced at $100. You can assume you'll be able to sale three of these a month to get an estimated value of $3,600 a year.
Then you can discount that figure by some percentage to adjust for any risk. When I sell starter businesses I usually discount estimated earnings by 10-20% (sometimes more) and set that as the asking price.
For any type of business, be sure you also understand all of the expenses that go into running it. Then reduce the revenue by expenses to get a clear sense of the actual or potential profitability.
When purchasing a business you want to be sure you have a contract detailing exactly what you are getting and ensure any funds turned over are protected until the business is transferred.
When purchasing a business within an existing marketplace or with a reputable broker, they will typically use an escrow account to hold the funds during the transfer process. The funds won't be released until the buyer gets what she or he paid for.
When purchasing without an escrow, please be sure you can trust the individual or company you are transacting with. It's best if they have a strong digital presence and multiple means of contact, and use a legtimate method of accepting payments.
For instance, Concept Shop is a relatively new studio but it is tied to my personal brand so any unethical behavior will have a direct impact on my reputation. Therefore, my readers and clients can trust that they are getting what they pay for.
The transfer process involves the seller turning over all the business assets to the buyer. During the transfer it's critical to check that you are receiving exactly what was outlined in your contract.
Moreover, it's important to get all the information you need to begin running the business smoothly. Ideally, the seller will compile easy-to-read documentation and even offer a live session where they walk you through everything. Even better if they agree to provide support for a period of time after the transfer.
Buy a business from Concept Shop
As a fellow entrepreneur I know that the biggest challenge you face is coming up with great ideas, while the second biggest is getting those ideas off the ground. It's also clear that the upfront investment in a new business is often prohibitive.
There's a saying in the entrepreneurial community that it always takes twice as long and costs twice as much as you think. According to the U.S. Small Business Administration it costs upwards of $5,000 in upfront expenses just to get a small business off the ground.
As a business coach, I've seen my clients take at least 3-6 months to bring a new business idea to market. And in my own experience, neither the cost nor the time comes close to the amount of energy you drain — it can really be an exhausting process.
This is why I went searching for a solution that made it easier for aspiring and serial entrepreneurs to start running their dream business in hours or days instead of months with significantly less startup stress.
I ended up buying out a brand studio that designs stunning websites and, coupled with my business knowledge, we build unique, ready-to-run business concepts in profitable niches.
Most of the websites are content-driven starter businesses in popular categories such as personal growth, wellness and business, available for an investment as low as $1000 (only a fraction of the average cost to start a new business).
You can start running the live websites as-is, hire the team to redesign it with your own content, or even commission them to design a website from scratch if you don’t find a concept you like and have another great idea.
Of course I'm biased, but I specifically engaged in this partnership in order to give my readers and clients a more streamlined path to running a thriving business.