It has always been clear that entrepreneurism is the surest path towards financial freedom. But in 2012 it may also be the only sure bet on the table. The costs of living continue to rise, while employees’ paychecks stagnate or even shrink. If you are lucky enough to have a significant amount of capital on hand, because you already run a successful business, you’ve invested wisely, you’ve come into an inheritance or because you’ve worked long and hard for several decades, you’d be wise to get into the business world. But should you start your own business or purchase an existing one? There are pros and cons to each, so consider the question from all angles before making your choice.
First of all, there is the issue of risk. The majority of small businesses won’t last through their first five years, regardless of how strong the initial idea. Venture capital companies spend months researching businesses to invest in, and they still choose companies that fail around 20% of the time. When you start a business you have no idea if your great idea will translate into consistent customer interaction, or if a bigger competitor will simply blow you out of the water. When you buy a company that is already established, you know they have customers, a strong reputation and a workable bottom line. Instead of starting from scratch you only have to improve what is already in place. At first glance, that seems much preferable.
The way value is created or dispersed is also very different in each case. When you start your own business, you are responsible for creating all the value. Where nothing existed now there is something, and every good choice you make along the way increases the financial value of the company. You get out of it what you put in, in a fairly organic development. When you buy out an existing company you are paying for value that has already been created. That means you end up having to pony up financially for all of the sweat equity that went into making the company what it is. You may end up having to pay more for the company than it is worth in reality, just to placate the previous owners. And then you won’t have the money on hand to improve upon the company.
When you buy an existing company, you could also face taking on preexisting problems you weren’t prepared for. Your lawyer and accountant will of course look over everything top to bottom, but issues can still slip through the cracks that limit your ability to make money off of the purchase in the future. When you start the business yourself there are no such surprises. Of course, you may be limited by problems you created yourself, and will suffer the consequences if you can’t turn things around. But you’ll have the benefit of knowing the business inside and out, and less surprises means less headaches.
Finally, you’ll have to think about the rewards of a purchase versus the rewards of starting from scratch. Financially you’ll begin to make money right away if you buy out a company, as it is already well established and probably turning a profit. Startups could take years to become profitable, and in fact could lose money at first. Starting from scratch requires vision and patience, while buying a company requires nothing but a savvy Tampa business broker and a large chunk of liquid capital. One choice isn’t necessarily better than the other, but your temperament could be the deciding factor between the two.