Starting vs Buying a Business

Starting vs Buying a Business

Posted on September 10, 2018
Asking any CPA or CFP about starting vs buying a business prompts the apt advisor to reach for a pen, paper and calculator.  
First, let’s discuss buying a business.  The size of the business a buyer can buy depends on the balance sheet and experience of the buyer making the acquisition.  For sake of example, assume a business with an SDE of $500,000/year is acquired at transfer prices of each of $1,000,000 and $1,500,000.  The $1,000,000 sale price would probably require up to $150,000 for aquisition/closing/financing costs.  The annual debt service on 10-year financing would be around $140,000/year.  So, annual cash-flow after ADS would be $360,000 and return of the acquisition investment would only be about 3 ½ months.  
 
For a $1,500,000 acquisition of the same company, the acquisition/financing/closing costs would be around $220,000 and the annual debt service would be approximately $200,000/year.  Annual cash-flow after ADS would be $300,000 and return of investment would be about 9 months.  
 
One might assume acquiring a business that large and successful would be difficult but businesses like that are placed on the market every day.  It should also be considered that trying to build a business of that size would take considerable resources to start from the ground up and could never be expected to reach that profitability without a considerable amount of time and hard work.  To most people, stepping into a business with the realistic expectation of writing a check to oneself as the new owner one week after buying the business is very attractive.  
 
On the other hand, starting a business takes capital and the most valuable resource one has – their time.  It is beyond the scope of this article to estimate startup capital necessary for all business models.  If one has the balance sheet to get financing without writing any checks themselves, they have the balance sheet to acquire a turn-key business earning more than any amount expected from a startup.  
 
In any comparison ever published, the ‘buy’ scenario beat the ‘startup’ scenario.  Beyond the ‘numbers’ involved with buying vs selling, there is the consideration if a startup will even succeed.  Anyone denying the possibility of failure should consider investing in a proven, established business and grow that business even further.  
 
The question of starting vs buying doesn’t come up very often.  One doesn’t have to think very long to deduct all that has been written in this article.  The next time someone you know or someone you advise asks the question of ‘buy vs sell’ challenge them with starting at ‘Less than Zero’ and how long the payback period of a comparable buy or sell is.  

Tom Stayanoff is a Senior Broker with Indiana Equity Brokers and specializes in serving small and medium-sized businesses in Northern Indiana.