Buy vs Build
Being an entrepreneur typically insinuates starting your own business from ground zero and turning it into your dream. However, over the past several years a new way of thinking has become popular called "acquisition entrepreneurship".
The term means exactly what it sounds like. Buy a small business and use that as a way to jump start your entrepreneurial journey versus starting a business from nothing. Several of the world's most famous entrepreneurs have gone this path such as Elon Musk (Tesla), Warren Buffet (Berkshire Hathaway), and Howard Schultz (Starbucks). Every entrepreneurial path has risks, but due to the surge of digital businesses for sale online it has become a more realistic option to acquire a business versus start from scratch.
Most people do not think buying a business is possible, but the availability of SBA loans has made this far more accessible. We wanted to compare these two paths so that you can make the best decision for your entrepreneurial endeavors.
BUILD A BUSINESS
Starting from an idea and executing against that strategy can be lucrative or a complete waste of time. New ideas can be hard to come by in this age of entrepreneurship. Currently most companies are building some sort of minimum viable product based on their initial ideas and hope to raise venture capital to expand the product and team. Raising venture capital is an extremely difficult task because not only do you need the right team and right idea you have to be lucky enough to get meetings and raise the capital required.
There are so many companies that are able to do just that but that's an overwhelming minority. The most recent statistics show that only 0.05% of companies were able to raise seed funding out of the tens of thousands that tried. The upside to starting from your idea is that you have more flexibility in what you are building and what you are working on. Starting from your initial idea also has inherent risks - what if your idea is not what customers are willing to pay for?
Although this path involves its own risk, you are provided more flexibility and less downside risk compared to being an acquisition entrepreneur.
Keys to this path:
Have a great idea and validate it
Willingness to go all-in
Ability to handle hearing “no” constantly
Financial runway to live 1-2 years with little to no income
Skilled in networking and team building
BUY A BUSINESS
Acquisition entrepreneurship provides its own sets of advantages and disadvantages that are distinct from the “normal” path of entrepreneurship. There are thousands of wonderful online businesses for sale, and we are one of the platforms that help facilitate this matchmaking process.
The most common disadvantage while buying a business is that it requires significant cash up front or necessitates you taking on debt. However, as long as you are buying a reasonably-priced business and have done your due diligence then you will have cash flows from the business to pay off that loan. With an SBA loan, you can put down 10% (minimum allowed) of the purchase price or even up to 75% of the purchase price of a business. Think of the SBA process as buying a home, except you will start getting income from day one.
The magic of acquiring a business is that there is already a proven and profitable business model in place that customers are willing to pay for. Most businesses sell for between 2-4x earnings, which means there will be a very generous amount of free cash flow for you to pay off the loan ahead of schedule and still take a salary while owning 100% of your business.
There is also another model called OaaS, or Operator-as-a-Service, where someone can buy a company and then pay someone else to run the day to day operations of the business. This allows you to stay flexible, keep the risks low, and start producing extra income after month 1. Taking a loan out can be intimidating, but through buying a business of your choice you can wait until you find a perfect business that allows you to the cash flow to pay off the loan and grow the business from a practical starting place with pre-existing customers.
Keys to this path:
Ability to be patient and wait for the right company to acquire
Willingness to take on debt if needed
The determination to learn a new industry
Both of these avenues have advantages and disadvantages, but what we like most about the acquisition route is that there is an already proven business model that has paying customers and a willing supporter base. Also, there is often untapped revenue potential that can lead to quick growth upon purchase.