For entrepreneurs, this is the age-old question: Is it better to buy an existing business or is it better to build one?
According to Canada.ca, small businesses are defined as those having one to ninety-nine employees. In Canada, 97.9% of all employers are small-business owners.
By creating a new business, otherwise known as a start-up, the advantage is that the organization is entirely at the helm and can thus customize product or service offerings, content, and brand messaging, as well as target specific client profiles and geographic areas, all to meet their vision of the business. In essence, the entrepreneur can put their own fingerprint on it.
It stands to reason, then, that the rationale for choosing to build over buy is that the downside of buying an existing business is that one may run the risk of having to undo the mistakes, missteps, or misfortunes made by others.
When an existing company is purchased, there are major advantages. Recognized businesses have an existing product or service offering with a proven track record of success and client base. The market research is complete for a recognized business, so the pricing structure, marketing strategy, product pricing, and service providers are already well-known.
These, when coupled with a tested infrastructure, allow an entrepreneur to scale up with an established framework and tweak the existing footprint rather than engineering it from the ground up.
Don't take our word for it that it's better to purchase an established business, though; We leaned on a real estate expert for his take to guide us through this discussion.
Windsor-based REALTOR ® and leader of The Vanguard TeamRhys, Wyn Trenhaile weighs in:
“I’ve learned the hard way, as many of our clients have, that start-ups are exciting, shiny, and new, and have all the promise in the world. But that’s just it. Promise. And almost all of them crash and burn, taking your hard-earned investment capital with the sinking ship. But what I’ve found over the years, both as a REALTOR ® and an investor, is that there are all these baby boomers retiring with perfectly good, profitable companies, typically with real estate included. They’re not looking to maximize returns anymore, they’re not looking to bilk you on the real estate values, they’re looking for a good exit.
A surprising number of these exiting owners are extremely interested in helping after the sale, to make sure their baby keeps going and growing. A lot of times they know a ton of potential ways to increase revenues and value add opportunities, it’s just, well, they’re done; it’s time for the younger generation to pour their energies into building up that existing business. When you work with us, we separate the good from the bad and the ugly and advise you accordingly on which business purchase opportunities we’d focus on ourselves and why.”
We, at Canadian Real Estate Wealth, agree with the approach advocated by Mr. Trenhaile;
Buying an existing business or acquisition entrepreneurship is a savvy approach that allows investors to jumpstart their cash flow by leveraging existing infrastructure, thereby bypassing the competition stuck in the starting blocks of start-ups.
Start-ups Can Be Risky Business.
According to the Small Business Administration, 9 out of 10 small businesses don’t survive their first year. When asked, the business owners surveyed cited these as the reasons:
- Cash flow: They simply run out of money.
- Poor Market Conditions: The root cause for this is often ineffective market research to ensure the need for the product or services in the geographic or digital space.
- Personnel Issues: These can be not hiring the right people leaving important tasks incomplete or done poorly, or simply bad partnerships.
- Competition: This, too, can be linked back to poor market research; Understanding who is also in this space, what they do well, and what the opportunities are is essential.
Show Me the Money.
The circumstances are ideal for acquisition entrepreneurs for the following reasons:
Baby Boomers are Bailing.
Baby Boomers are defined as people born in the years following World War II. These folks are between the ages of 59 and 77 years old, so many are already retired, or considering retirement.
Since their goal is to wrap up their interest in the business and move onto the next stage of their life, their number one priority is a seamless exit, as opposed to maximizing their profit.
This generational change, which we spoke about in a previous piece is making it a buyer’s market.
Opportunity Calls: Digital Dynamic Transformation.
Many business owners of the baby boomer generation didn’t learn how to navigate the online marketing world.
For many, the digital landscape wasn’t present at the time that they established their business, or it was in its infancy and legitimacy untested.
This opportunity allows the tech-savvy investor to build a multitude of efficiencies into an acquired business through automation, AI, crowd-sourcing services, and social media marketing. In turn, this positively impacts reach, brand awareness, and, if done correctly, ultimately, expansion of the existing customer base.
Buying Existing Cash Flows with Cheap Money.
As recently as April 12th, 2023, the Bank of Canada indicated that the normalizing of the global supply chain, lower energy prices as well as its national fiscal tightening policy have all paid off, and, as result, core inflation is decreasing.
Canadians are starting to see the cost of lending stabilize as a result.
We turned to Broker and 30-year real estate veteran Rhys Trenhaile for his insight into how current economic conditions are advantageous for acquisition entrepreneurs. Here is what he had to say,
“Certainly, with the interest rates stabilizing and seemingly inflation decreasing beautifully, while the economy seems to continue to chug along, we are now strongly advising our investor base to buy before others slowly figure it out. Investors can confidently acquire these companies when they have access to predictable and reasonable debt. This means they will still have enough cash flow coming in for immediate profit, and also the monies required to affect those value-add opportunities into the system. When you buy an existing business, the idea is to use the company’s own cash flow to improve the company, modernize the company and substantially increase the profitability and annual returns even more. Very tough to do if interest rates and inflation keep climbing. But now it appears the worst of these two factors is over, and we’re recommending buying these companies again. We have direct relationships with all 7 major M&A outfits in the area and can find the right fit for you based on your investment goals.”
Statistically speaking, acquisition entrepreneurs take less time to reach their first million-dollar mark than those who embark on a new start-up.
If we turn again to Canada.ca, the national statistics are grim. Between 2015 and 2019, 101,324 small businesses were created and the average number that disappeared annually was 90,151. All to say, the decisions made in the first year of business are critical to its viability and sustainability.
There is a positive correlation between due diligence by acquisition entrepreneurs and business success. One way that this is achieved is by working with local real estate agents familiar with the topography of the local commercial real estate market.
If you are considering a business purchase in the Greater Windsor Area (and you should it’s touted as the province’s most affordable city, predicted to have massive economic growth over the next 10 years), consider leveraging the experience and expertise of Rhys Trenhaile by contacting him at [email protected].