The Benefits of Buying vs. Starting a Business

So you want to be your own boss.  Consider the options – starting your own business vs. buying an existing company. 

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.  

On the other hand, purchasing an existing business reduces an entrepreneur’s risk while creating opportunities for tremendous profit. 

 There are a number of reasons to consider the purchase of an existing business rather that starting one: 

• Risk.  An established business with strong cash flows is far less risky than a startup.
• Branding. The ongoing benefits of any marketing or networking the prior owner has done will transfer to the new owner.
• Proven Concept.  A business with a track record is more likely to qualify for credit.  A bank can rely on historical financials, not just projections.   
• Key Personnel.  The employees have already been trained and assimilated into the company culture. You will have an easier time implementing growth strategies. 
• Focus.  The seller has already laid the foundation and taken care of the time-consuming, tedious start-up work. You can focus on improving and growing the business immediately.
• Goodwill/Relationships.  You will have an existing customer base and vendor base that took years to build.  It’s very common for the seller to transition with the business for a short time to transfer those relationships to the buyer.   
• 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.  On the other hand, start-up businesses aren’t expected to profit for the first three years.

Becoming your own boss always involves a 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 startup.  “Working for someone else is trading time for money, but doesn’t build equity. As an entrepreneur, you are the master of your own destiny.”

Source: IBBA website

How Valuable Is the Goodwill Of Your Business?

Goodwill. What is it? Does your business have any? If so, how do you measure it? In simple words, goodwill can be synonymous with a “good-name,” “a good reputation” and/or “a wide business connection” which helps the business to earn more profits than that of a newly started business. Goodwill is an intangible, salable asset arising from the reputation of the business and its relations with its customers, distinct from the value of its stock and other tangible assets. Goodwill is a term that is used to reflect a portion of the market value of a business entity.

Historical academic and accounting icons, such as Professor Dicksee, describe goodwill: “When a man pays for goodwill, he pays for something which places him in the position of being able to earn more than he would be able to do by his own unaided efforts.” According to J. O. Magee “The capacity of a business to earn profits in future is basically what is meant by the term goodwill.” According to Lord Justice Lindley “The term goodwill is generally used to denote benefit arising from connections and reputation.” John Scott has defined goodwill as “Goodwill is nothing more than the probability, that the old customers will resort to the old place.” In the words of Lord Macnaghten, “Goodwill is a thing very easy to describe, very difficult to define. It is the benefit and advantage of the good name, reputation and connections of a business. It is the attractive force, which brings in customers. It is one thing which distinguishes an old established business from a new business at its first start.”

After reading that, you may be scratching your head wondering how something so seemingly vague and invisible can be assessed and valued as an asset of your business—something that a potential buyer would pay for. There are two common approaches to assessing a company’s goodwill. One uses historical financial data; the other considers the industry and region in which the company operates. Furthermore, it’s important when buying a business, that the goodwill is inherent in business itself, and is not based solely on the owner. Don’t underestimate the power of goodwill. Consider the limited physical assets of Facebook and the level of its goodwill. Then consider a company with a high value of physical assets but very limited
goodwill. Which one is more likely to attract paying customers on a long term basis? Which one is more valuable? More salable?

BC Business Brokers have in-depth university training in the 12 common accounting methodologies of Business Valuation, in addition to understanding the impact of intangible assets (like goodwill) in the context of industry trends and geographical location. If you are contemplating the sale of your business, or considering small business ownership, contact the Sunbelt Nanaimo office – we can help you. We are licensed realtors specializing in business transactions and commercial property.