Buying a business vs starting from scratch

[GuestR401x3]

I am currently reading a book called "Buy than Build" by Walker Deibel and wanted to hear your thoughts on this.

He says in the book that you can buy an existing company for very little down, and you will have a lot higher chance of success than starting a business from scratch.

According to Deibel starting a business from scratch has a 1 out of 10 chance of success. But by buying an existing company you own an asset with a proven product, paying customers, employees, and brand awareness. You pretty much skip the growing pains.

Because you are a fresh mind and an entrepreneur after acquiring a business that is often running on legacy systems, you can do a lot to improve profit. You can improve operations, decrease cost, increase prices, improve sales and marketing, etc.

What do you think, is buying a business rather than starting from scratch a better way to start your entrepreneur journey?

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[SteveO]

I am currently reading a book called "Buy than Build" by Walker Deibel and wanted to hear your thoughts on this.

He says in the book that you can buy an existing company for very little down, and you will have a lot higher chance of success than starting a business from scratch.

According to Deibel starting a business from scratch has a 1 out of 10 chance of success. But by buying an existing company you own an asset with a proven product, paying customers, employees, and brand awareness. You pretty much skip the growing pains.

Because you are a fresh mind and an entrepreneur after acquiring a business that is often running on legacy systems, you can do a lot to improve profit. You can improve operations, decrease cost, increase prices, improve sales and marketing, etc.

What do you think, is buying a business rather than starting from scratch a better way to start your entrepreneur journey?

Mismanaged businesses are everywhere. That is the way to go if you know what you are doing.

 

[Johnny boy]

Most businesses are just jobs. Make sure you aren't buying a job, or if you are, you are smart enough to convert it into a businesses.

 

[eramart]

for very little down

I doubt that a successful company with proven record will cost less than industry average, and that will probably be a lot. There are exceptions, but they are usually private deals - like older owners selling the company to somebody they trust, or one partner selling his share to other for some reason.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[Nomads]

It depends on the industry you are trying to buy your way into.

A lot of family-owned businesses are reaching their natural end, as the owner's children/family don't want to take them over, and they eventually want to retire. A lot of the younger generations want to get famous on YouTube & TikTok rather than take over Dad's plumbing company that is pulling in millions/year.

As you said, these businesses are also generally super old school - paper receipts, poor marketing, everything takes 10x longer than it should, etc which are all opportunities to improve the business. Buy a business, improve efficiency, and continue building upon the foundation the previous owners built.

 

[GuestR401x3]

I doubt that a successful company with proven record will cost less than industry average, and that will probably be a lot. There are exceptions, but they are usually private deals - like older owners selling the company to somebody they trust, or one partner selling his share to other for some reason.

You can get SBA loans backed by the government with only 10% down. Still a decent chunk of money but if you have the cash or are willing to get a partner to buy into 10% of the business for the down payment price you could do it with nothing down (Don't know the logistics of this, just thoughts off the top of my head).

It depends on the industry you are trying to buy your way into.

Talk more about this.

 

[eramart]

You can get SBA loans backed by the government with only 10% down. Still a decent chunk of money but if you have the cash or are willing to get a partner to buy into 10% of the business for the down payment price you could do it with nothing down (Don't know the logistics of this, just thoughts off the top of my head).

7(a) loans? Don’t know much about that, since I’m not in the US, but maybe some folks here can tell more about that.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[iivalky]

I am currently reading a book called "Buy than Build" by Walker Deibel and wanted to hear your thoughts on this.

He says in the book that you can buy an existing company for very little down, and you will have a lot higher chance of success than starting a business from scratch.

According to Deibel starting a business from scratch has a 1 out of 10 chance of success. But by buying an existing company you own an asset with a proven product, paying customers, employees, and brand awareness. You pretty much skip the growing pains.

Because you are a fresh mind and an entrepreneur after acquiring a business that is often running on legacy systems, you can do a lot to improve profit. You can improve operations, decrease cost, increase prices, improve sales and marketing, etc.

What do you think, is buying a business rather than starting from scratch a better way to start your entrepreneur journey?

Buying a business should require plenty of research. What if the business you bought was sold because it is failing? Obsolete? You'll have to do research see how successful it has been first. Then you can evaluate whether it's worth buying or a waste of money, buying an established business could save you time but you need to make sure that it won't be a money pit.

 

[Hong_Kong]

There have been a few other threads on here about buying a business with seller financing. There is one journey here: EXECUTION - Road to $100 Million

I think 100% seller financing is harder to get than using SBA loans, but much more powerful. The main challenge is finding an owner that has a motivating factor to sell. To find them, its really just a numbers game. If you can't get 100% SF, raising equity from a pool of investors is an option.

Look for businesses that have a large moat (ie hard for other competitors to enter), with a consistent list of customers.

Also in terms of knowing how to run the business, I don't think this actually matters. Once you buy the business, you control cashflows. Even if you screw up and the biz crashes, as long as you are paying yourself on the way down. Worst comes to worst, the seller takes the biz back, but if they were really 'motivated' to sell in the first place that would be difficult.

The big players in acquisitions have almost no experience in the industry from what I have seen personally. They only really care about the free cashflow covering debt servicing costs (plus profit). Even on 8,9 figure deals (dozen location business, and mining for example).

In general a previous track record of either: running a biz, or raising capital will make this process easier.

 

[Hong_Kong]

It depends on the industry you are trying to buy your way into.

A lot of family-owned businesses are reaching their natural end, as the owner's children/family don't want to take them over, and they eventually want to retire. A lot of the younger generations want to get famous on YouTube & TikTok rather than take over Dad's plumbing company that is pulling in millions/year.

As you said, these businesses are also generally super old school - paper receipts, poor marketing, everything takes 10x longer than it should, etc which are all opportunities to improve the business. Buy a business, improve efficiency, and continue building upon the foundation the previous owners built.

Exactly, the baby boomers will transfer around $30 Trillion of assets over the next few decades. The vast majority of small / mid biz have no concrete succession plan. Having a team that can ensure continuity of operations, and maintain the legacy of the business while providing the owner's family a passive income stream. Especially if they get caught in a tricky situation and have to exit the biz fast.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[Stargazer]

If you don't know how to start, run and grow a business it is highly unlikely you will know what to do simply by buying someone elses.

Dan

 

[GuestR401x3]

The big players in acquisitions have almost no experience in the industry from what I have seen personally. They only really care about the free cashflow covering debt servicing costs (plus profit). Even on 8,9 figure deals (dozen location business, and mining for example).

I think you are on to something with this Elon Musk bought both PayPal and Tesla. Most of us are not going to be the next Elon Musk but by investing in a company that is proven to be profitable we can remove a lot of time and risk in the startup phase.

Exactly, the baby boomers will transfer around $30 Trillion of assets over the next few decades. The vast majority of small / mid biz have no concrete succession plan. Having a team that can ensure continuity of operations, and maintain the legacy of the business while providing the owner's family a passive income stream. Especially if they get caught in a tricky situation and have to exit the biz fast.

Another interesting thought, what would be the best way to find and get in front of these types of businesses?

If you don't know how to start, run and grow a business it is highly unlikely you will know what to do simply by buying someone elses.

You are semi-right but the goal is not to have a business that you don't know how to run, although I would argue that industry knowledge can be learned as long as you have business knowledge.
It's more to own a business that is proven to be profitable, has a customer base, but has some aspects you know you can improve.

 

[Hong_Kong]

Best way to find those businesses? Choose your industry (ex: health care). Make a list of companies. Call them up. Ask them more or less if they have ever thought of selling the biz. This won't be easy, and will likely require around 2000 calls to complete one deal. The faster you make these calls, the faster you can close a deal.

You are semi-right but the goal is not to have a business that you don't know how to run, although I would argue that industry knowledge can be learned as long as you have business knowledge.

Build a board before you start any of this. On your board have 2 industry experts (retired owners, managers, etc.) A lawyer, and accountant. IDEALLY all team members have previous M&A experience, and have been on either side of a buy out previously. If you really don't know how to run these businesses, ask the your board. Give your board equity in a holding corporation (Family Legacy Partners Ltd. or something that tells them what you do). They get equity and board seats, you get free expertise and credentials you can use to be in a better position with the seller.

Ultimately it doesn't matter at all if you don't know ANYTHING about the business. If anything it makes it easier. Once you control cashflows, its irrelevant anyway.

Oh, and lastly as you buy more deals, don't leverage one to buy another. Each deal should be independent so if it does go down, who cares it goes back to the seller, you paid yourself some $, and you still have the other deals and deals in the pipeline. Zero fear.

For example the mining deal, or other multi location businesses LBO deals I've seen, the guy aquiring these companies used $0 of his cash, and had 0 days of experience running those businesses. Just deep pockets (equity + debt investors) that he can call up. He did a terrible job running the businesses (lawsuits, conflict, employees quitting, unanimously hated.) but it doesn't matter, just pay yourself and the board as much as possible.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[The Sandman]

I am currently reading a book called "Buy than Build" by Walker Deibel and wanted to hear your thoughts on this.

He says in the book that you can buy an existing company for very little down, and you will have a lot higher chance of success than starting a business from scratch.

According to Deibel starting a business from scratch has a 1 out of 10 chance of success. But by buying an existing company you own an asset with a proven product, paying customers, employees, and brand awareness. You pretty much skip the growing pains.

Because you are a fresh mind and an entrepreneur after acquiring a business that is often running on legacy systems, you can do a lot to improve profit. You can improve operations, decrease cost, increase prices, improve sales and marketing, etc.

What do you think, is buying a business rather than starting from scratch a better way to start your entrepreneur journey?

This is what I'm looking to do. It's a different skillset to run/grow an established business vs. build from scratch. Kinda like buying a house that's a bit of a fixer vs. building new.

I haven't read the book, how does he define "very little down?" I'm looking at an SBA loan, requiring 10-20%.

 

[GuestR401x3]

This is what I'm looking to do. It's a different skillset to run/grow an established business vs. build from scratch. Kinda like buying a house that's a bit of a fixer vs. building new.

I haven't read the book, how does he define "very little down?" I'm looking at an SBA loan, requiring 10-20%.

I think 10% is the minimum unless you convince the seller to put half of the down payment on standby in which case you can only pay 5%.

If you are buying a business at the moment I would highly recommend you buy the book. It will be well worth your $17. Also, don't get the audio version get the physical version, I only have the audible book and I wish I would have gotten a physical copy. There are so many pages that you'll want to be able to quickly reference.

if you have the cash or are willing to get a partner to buy into 10% of the business for the down payment price you could do it with nothing down

Possibly look into this, I don't know any logistics though.

 

[Hong_Kong]

I haven't read the book, how does he define "very little down?" I'm looking at an SBA loan, requiring 10-20%.

I think 10% is the minimum unless you convince the seller to put half of the down payment on standby in which case you can only pay 5%.

First offer should always be 100% seller financing. Its better to offer more money for the biz, but totally seller financing. Once you own the biz, you can always refinance against assets (including accounts receivable) and use this loan to pay off the seller faster.
In the other thread I linked the poster completed one acquisition with 100% SF already.
A common approach to negotiate 100% SF is to ask the seller: "Whats more important, how much money you get, or when you get it?" If they pick the amount as being more important, you then offer a higher number but with preferable terms.
The starting terms commonly used are 20 to 30 year amortization, interest only to start but with a big 3 to 10 year balloon payment. This gives you time to refi before the balloon hits you.
If they are concerned about the SF, then you bring up your board that you built and their ability to manage this deal. You can turn this around on them by asking them if their concern has to do with the business itself or with your team.
"If you built a great business, and we have a team with ___ years of experience on board, what is your concern regarding seller financing?"
You can also mention that you will refi as soon as possible to pay them back, but the seller financing allows for a smooth transition and for you to deploy more capital into the business as needed.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[MakeItHappen]

First offer should always be 100% seller financing. Its better to offer more money for the biz, but totally seller financing. Once you own the biz, you can always refinance against assets (including accounts receivable) and use this loan to pay off the seller faster.
In the other thread I linked the poster completed one acquisition with 100% SF already.
A common approach to negotiate 100% SF is to ask the seller: "Whats more important, how much money you get, or when you get it?" If they pick the amount as being more important, you then offer a higher number but with preferable terms.
The starting terms commonly used are 20 to 30 year amortization, interest only to start but with a big 3 to 10 year balloon payment. This gives you time to refi before the balloon hits you.
If they are concerned about the SF, then you bring up your board that you built and their ability to manage this deal. You can turn this around on them by asking them if their concern has to do with the business itself or with your team.
"If you built a great business, and we have a team with ___ years of experience on board, what is your concern regarding seller financing?"
You can also mention that you will refi as soon as possible to pay them back, but the seller financing allows for a smooth transition and for you to deploy more capital into the business as needed.

Is this you or Dan Pena speaking?

How many deals have you done in industries where you have zero experience?

 

[The Sandman]

If you are buying a business at the moment I would highly recommend you buy the book...

Added to my list. Just ordered HBR Guide to Buying a Small Business and I want to read that one first.

First offer should always be 100% seller financing. Its better to offer more money for the biz, but totally seller financing. Once you own the biz, you can always refinance against assets (including accounts receivable) and use this loan to pay off the seller faster.
In the other thread I linked the poster completed one acquisition with 100% SF already.
A common approach to negotiate 100% SF is to ask the seller: "Whats more important, how much money you get, or when you get it?" If they pick the amount as being more important, you then offer a higher number but with preferable terms.
The starting terms commonly used are 20 to 30 year amortization, interest only to start but with a big 3 to 10 year balloon payment. This gives you time to refi before the balloon hits you.
If they are concerned about the SF, then you bring up your board that you built and their ability to manage this deal. You can turn this around on them by asking them if their concern has to do with the business itself or with your team.
"If you built a great business, and we have a team with ___ years of experience on board, what is your concern regarding seller financing?"
You can also mention that you will refi as soon as possible to pay them back, but the seller financing allows for a smooth transition and for you to deploy more capital into the business as needed.

One business that I'm looking at won't qualify for SBA so I'll explore seller financing. Broker says he'll need enough down payment to cover capital gains and the broker's fee. I'm not getting my hopes up but we'll see.

 

[Hong_Kong]

Is this you or Dan Pena speaking?

How many deals have you done in industries where you have zero experience?

I haven't personally completed any acquisitions yet, but I'm speaking from experience from the two big deals I've seen as mentioned above (8 /9 figure deals) where the buyer has has 0 experience (I know the people selling the business). Like think of owning a mine, and you don't even know how the mineral comes out of the ground. Not even one day in industry. Looking at a real world deal and seeing all the numbers makes the process much easier to conceptualize.

Added to my list. Just ordered HBR Guide to Buying a Small Business and I want to read that one first.



One business that I'm looking at won't qualify for SBA so I'll explore seller financing. Broker says he'll need enough down payment to cover capital gains and the broker's fee. I'm not getting my hopes up but we'll see.

The HBR book is good but focuses a decent amount on the equity investment rather than debt. And avoid brokers if you can, they aren't in your best interest.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[The Sandman]

And avoid brokers if you can, they aren't in your best interest.

How else do you find businesses for sale?

 

[Hong_Kong]

How else do you find businesses for sale?

Pick up the phone. This is the hardest part of the process. Nothing but volume.

Sites like bizbuysell are useful only for finding a target industry and get a rough idea of the numbers. Lets say the biz you found via the brokers was in health care (lets say labs), get a list of all lab companies in your target region. Call them up, ask to speak to the owner. Then ask is they have considered selling. Most will say no.

The other way you can deal with brokers is going around them first, then back to them. Basically let them know you already worked out a deal with the seller, and you will include cash for their commission. Wouldn't recommend it.

There is nothing easy about this process and its really a grind.

I would suggest the book "Wining through intimidation" by Ringer.

 

[Walter Hay]

There is a relevant thread worth checking out:

Taking over business from retiring baby boomers.​

I have witnessed a business buyout in which a huge company bought a small business that appeared to be an ideal match to the big corporation's other activities, but it turned sour.

At the time I was still employed as an accounts clerk, and I obtained the position advertised as company accountant to the newly acquired small business.

I enjoyed the work, and in the process of generating proper record keeping I discovered that the big corporation had been scammed. They had obviously failed in doing careful due diligence.

The previous owner of the small business had issued and recorded fake invoices over a long period, amounting to $$$millions. One of the first tasks I set myself was to collect the overdue payments.

I had copies of all those invoices, but they had never been sent to the fake customers.

Heads rolled at head office, and I was given a big raise and a promotion.

What a shambles.

Walter

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[Niptuck MD]

I only have the audible book

pdf

 

[RussRussman18]

You are skipping the most difficult part of creating a business. But you aren't necessarily skipping the most difficult part of creating a business that isn't tied to your personal time and is also highly profitable. It's possible that some of these businesses are being sold by trust fund kids who want to become famous or start some sexy tech company. It's also possible that these businesses are being sold because the owners have tried and failed to convert them into low-effort money machines. Just something to think about

Also, Dan Pena has been mentioned in this thread. He is a con artist, don't trust his ridiculous lies

 

[Romsweb]

I totally agree that buying a business can be a really great shortcut, because I did it 11 years ago.

Mine was a BAAS Backup As A service company, I paid 3x the annual revenue, with a 4 years loans...

I had to put some money the first year for the loan ($5K), but since then, it has been a cash machine.

Services done by IT servers h24, I just level up the service and the 1-person technician team to supervised, I choose a business partner that manage the IT infrastructure, and the technician. Everyone is happy.

I choose Tech business and overpaid for it because I knew had an unfair advantage... I knew a lot of companies from my sales B2B IT job to do JVs with (kind of dream100 before I knew that exist), it's why I "overpaid" it, big jumpstart, kind of no money upfront.

Now I look more at boring business to buy, which I will not operate, baby boomers retiring, etc... it must generate cashflow, I must have an unfair advantage (I'm a geek, system, process, sales, networking guys, so it might only be a way to digitalize the business making life easier for the customer and the crew).

Codie Sanchez have an interesting newsletter, and YouTube channel about this (unconventional acquisitions).

I started two others companies from grownup since them, and I can tell that buying a company is my favorite to jumpstart the process, just take the time to choose it, don't rush!

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[GuestR401x3]

Buying a business can cost anywhere between $10,000 to $100,000

I would have assumed that it's more like a minimum of 100,000 down at a 10% down payment rate. Am I wrong?

 

[RussRussman18]

I would have assumed that it's more like a minimum of 100,000 down at a 10% down payment rate. Am I wrong?

Businesses usually sell for multiples of annual revenue. So a business that you could buy for 10-100k would probably not be a good fastlane prospect.

 

[Albert KOUADJA]

Running a purchased business would always be more difficult than one you built yourself. If it's a self-built business, you have more control over certain things such as what works well and what doesn't. and you have more control over things on a lot of settings like staff and such. But you buy a business, you will have to learn how it was managed and operated. Learn to familiarize with it first.
if you're lucky if the owner wants to sell it for reasons that aren't related to ultimate bankruptcy and if he was honest before selling it to you, that's even better. That said, if he just wants to pursue other things (his passions, wildest dreams).
It's true that buying a business seems like a good deal at first glance, but there would surely be a lot of work to do, especially when the person buying it has never bought a business. it's fine to buy a business if you have already run a business and also have enough cash flow.


personally, if I had the money I would try if the opportunity arose and see how it would go. But currently that's not part of my plans

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[JIRS]

When I hear "buying a business" two cases that I know of come to mind. This is a n=2 from my perspective, so take it with grain of salt, but I realized that buying a business and thinking you can improve it is far from easy.

#1. Austin, TX, 2001, car transmission shop. My car's transmission died and I had to replace it, I started a conversation with the manager and he explained how at this current shop he had a nice deal where t this shop he was a partner and he got (%$) commission from every sale. He also explained that he used to manage another transmission shop and a guy with an "MBA" bought it and started trying to optimize the business and squeeze everyone in the shop. He left the "MBA's" shop and brought with him all the customers to this new shop where he was very happy. I assume that when the most knowledgeable employee left the "MBA's" shop and took a good chunk of customers with him, the MBA didn't have much to optimize afterwards.

#2. Tampa, FL 24/7 Gym around 2002. I was a very happy client of small gym ; I loved it because it was open 24/7 and I could go and exercise at odd hours of the night, I watched it go into a death spiral after it was purchased.... It stated with the owners (Father/Son) showing the business to prospective buyers.. this very beautiful family (Dad/Mom + 2 teenage sons) purchase it. As it turns that a few weeks after the previous owner finished training the new family owners, signs for a new national brand fitness gym start to appear across the street! (I don't know if it was a coincidence, but it always smelled fishy to me). The family attended the gym by themselves I started noticing they seemed worn-out by the 24/7 schedule very quickly, I watched the couple fight a couple of times likely from the stress of purchasing a business that was not what they expected, their daytime customers started to thin out likely because they joined the new shiny gym across the street, so they started closing the gym at nighttime, which is when I left. The following year, the family gym had closed. I hope the family fared well and that they didn't invest their life savings in that gym.

A third case is maybe the buyers of MJ's limo lead generation business in the fastlane... maybe they purchased at the wrong time, but buying a business without understanding the core is a risky proposition.