With the Chartered Professional Accountants of Canada...
The term “entrepreneur” was initially used to describe an individual who created a business venture. More recently, the term has been applied to any business owner. There is often a significant difference in the abilities between someone who “builds” a business and someone who “manages” a business. Put simply, there are “builders” and “custodians” and if you understand which group you fit into, this will determine in large part whether you should start or run a business.
People who have management skills tend to buy businesses rather than start them as their skill set is in managing people, money, processes, and systems. Entrepreneurs like the thrill of being first in the marketplace, the prospect of a big financial upside, and the recognition that comes with. On the other hand, buying a business is usually faster, cheaper, safer and easier to finance as you take over a customer base, cash flow, profit and proven systems (assuming the company is profitable).
It is important to keep in mind that it could take you a year to buy a business from the time you carry out a self-assessment, define your criteria for a business, locate a business, negotiate the purchase, arrange financing, structure the deal and close the sale. Compare that to how long it takes most start-up businesses to generate cash flows and become profitable. A rule of thumb is a business buyer will usually invest money equal to about twice their expected annual owner salary. The balance of the investment will be borrowed, either from family and friends, the bank or through seller financing.
Starting a business from scratch requires investment in leasehold improvements, equipment, inventory and working capital. However, to compare “apples with apples”, the true cost of a start-up business must also include forgone wages. The owner who leaves their job to start a business and work “free” for an extended time period has a true cost higher than just the cash outflow.
Apart from the ability factor, the other main motivation to start a new venture, rather than buy a business, is the potential. The potential and financial upside of a start-up can be enormous. Of course, the risk is also very high. It is extremely difficult for an acquisition to match the growth potential of a start-up that is on the cutting edge of the market. The good news is that there are plenty of companies that can provide you with an excellent income, secure lifestyle and increase your net worth. These businesses have manageable risks, which although they may have a smaller upside also have a smaller downside.
Norman P. Friend
Franchise 101 Incorporated