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Nov. 25, 2021

Build or Buy a Business?

Build or Buy a Business?

There are so many different ways you can think about the question of “build or buy” but I think the two most important frames for considering the question are time and money.

Time

When you buy a business you are buying something that is already working and probably generating free cash flow.  The time you spend on the business will be to help grow it (if that’s what you’re looking to do) or to ensure it keeps running as is.  When you buy a business you have a clear notion of how much time you are going to spend on the business each day/week/month/year and you’re in control of that.

When you build a business you’re going to be spending time like you wouldn’t believe to acquire items that a built business has dealt with long ago:

  • Building systems (an established business has these in place)
  • Making mistakes (this is the tuition you have to pay when starting from scratch)
  • Hiring and developing key team members (this will not be a question of days or weeks but of months and years)
  • Making mistakes (yes, this will keep happening; be patient and make adjustments)

You might have projections for when your business will break even or become profitable, but they are just projections and they will change frequently.  When you start a business you have no template for how much time you are going to spend on the business each day/week/month/year.  You will be developing that as you grow.  Starting a business from scratch can be an open-ended time proposition. 

Business buyers are paying with money to have control of their time.  Business starters are paying with time to get control of their money.

Money

On the other hand, buying a business requires an upfront capital investment.  There are creative ways to structure deals, including seller financing, but most times you are going to have to commit capital.

A startup business can (and should) be bootstrapped.  Some people don’t have access to a pool of capital to buy a business and as such they can’t use that capital to start.  But that’s also a benefit: not having a lot of cash means that you have to be smart about where you spend your money.  Coming from a VC background I can tell you that all the capital you can imagine won’t save you if your team and fundamentals aren’t sound.

Business buyers are using money to leverage and make more money to move up the lifestyle ladder.  Business starters are getting onto that lifestyle ladder on the first step.

Hybrids

There are situations that blur these delineations I’ve made above.

Sometimes business owners are just mentally “done” and want to sell in a hurry.  You may be able to get very favorable terms with them, up to and including 100% seller financing.  This allows those who might have bootstrapped a startup to step into a built business with no upfront capital outlay.

Other times burnt-out business owners have let a business decay and the culture and team members are going to need overhauling, so the would-be business buyer who wanted something turnkey is going to have to get into startup mode and fix these problems.  This can be an attractive opportunity because distressed businesses often sell at a discount.

Personality Matters Too

Finally do remember that there’s a risk model associated with business buying vs building.  Those who are more risk-averse like the idea of buying something turnkey that works on a set schedule.  Those who are less risk-averse have no problem jumping in and learning as they go.  Deploy your self-awareness throughout this process to make the right decision for you.

Photo by Pixabay from Pexels

ā€‹ā€‹This article was written by Neel from MaidThis Franchise, a remote-local franchise opportunity for people looking to escape the rate race and reach financial freedom. Learn more here.