Our monthly newsletter endeavours to give you insights in to changes and trends we are seeing in the market or industry.
Newsletter - February 2024
Welcome to 2024 and the Tabak phones, emails and website hits are certainly reflecting an increased interest by business buyers, and also from prospective new vendors. We have already had one confirmed purchase here in the South Island, with due diligence continuing on two other business, whilst we have just presented a multi-offer on a third – so activity aplenty. As such, we thought it may be helpful to reinforce why purchasing a business can often provide more options than a “greenfields” start up.
Buying versus Starting a Business
There are certainly pros and cons to both buying and starting a business. Here are some of the key reasons why we believe buying a quality business is a great option:
- Proven Concept. Buying an established business is less risky – as a buyer you already know the 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.
- 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 attract new business than with an unproven start up.
- 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. 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. 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.
- 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.
- Less Risk. 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, 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.
Becoming your own boss always involves some element of risk. When you buy a business, you take a calculated risk that eliminates a lot of the pitfalls and potential for failure that come with a start-up.
Damien Fahey; Partner
Tabak Business Sales, Christchurch