Become An Entrepreneur By Taking Equity Or Buying An Existing Business. Seven Key Insights

In the next ten years, 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 percent of new businesses fail in the first year, and 80 percent fail within five years. You might want to reduce your risk and leverage getting into an existing small business that you can accelerate.

There are two potential opportunities to investigate. One is the aging business owner who simply wants to get out and retire. The business will be solid, have cash flow but might have been neglected due to lack of investment in technology and/or more aggressive sales and marketing efforts. The second will be a company started by a founder who, after initial success, finds themselves unable to lead the company to the next level. This might be more of an equity stake opportunity where you can drive the value of your equity much higher by increasing revenue.

Ideally, Gen Z, Millennials or even Gen X should be lining up to become co-founders or even purchase these companies. Unfortunately, quite a few want-to-be entrepreneurs think they need an amazing idea to start a company. 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 or taking equity in an existing business greatly reduces an entrepreneur’s risk while creating opportunities for tremendous profit. There are a number of benefits to consider in purchasing or taking equity in an existing business rather than 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.

Business 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 and more customers 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’re 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 might already be 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. A lending institution will fund that transaction because historical revenues shows the cash flow and profitability can support the purchase price.

If you really would like to become an entrepreneur, start investigating small businesses in your local community that have the right ” bones” and could be grown dramatically. Look for an aging owner or a sole founder where your talent, expertise and drive could accelerate the company.

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