New entrepreneurs are enthusiastically adopting the “buy then build” approach. Acquiring and enhancing an existing business allows you to bypass many of the challenges associated with starting from scratch. While launching your own business typically involves lower initial costs than purchasing an established one, it requires dedication to build a customer base and successfully introduce your product. Companies with existing cash flow, brand recognition, and a proven business model enable you, or the person you co-invest with, to start strong. Let’s explore some key benefits of buying an existing business from an investor’s perspective.

Cash Flow from Day One

One of the most compelling advantages of buying an existing business is the immediate cash flow. From the moment you take ownership, the business is already generating revenue. This immediate cash flow significantly reduces the risk associated with starting a new venture. You won’t have to wait months or years to see a return on your investment; instead, you can start benefiting financially right away. This steady income stream allows you to focus on growth and improvement rather than worrying about covering basic expenses.

Existing Cash Flow

In business, cash is paramount. For small business owners, it can be a lifeline. Imagine starting your dream business only to discover it will take two years to break even and another two years to become profitable. Meanwhile, how will you cover your expenses or reinvest in your business for growth? This scenario can hinder many new ventures. You begin with passion, but financial realities can dampen your enthusiasm.

By purchasing an existing business, you benefit from established cash flow that has been consistent for years. There is unlikely to be any interruption in cash flow unless something unforeseen occurs. With existing cash flow, you’ll have one less worry as you work towards making your business a success.

A Proven Business Model

An established business that has been around for several years has a proven business model. As a start-up, you’re testing a hypothesis: customers will want my product or service. An existing business has already demonstrated that customers will buy, which is why it remains operational.

Established Customer Base and Market Share

When considering a business with longevity, there’s a good chance it has enjoyed strong sales and significant market share. If the owner has been compensating themselves and others while maintaining the business, it’s clear the business has a steady stream of customers and sales.

Conversely, starting a new business requires investment in marketing strategies, time, and effort. While waiting for your client list to grow, you’ll still need to cover expenses. All businesses need working capital to operate.

An Infrastructure That is Already in Place

Compared to startups, which require significant time and money to establish, an existing business is already operational. One of its most appealing features may be its prime location, whether in a bustling business district or a popular shopping center, contributing to its success.

Additionally, an existing business has essential operational elements, such as furniture, fixtures, and equipment needed to provide products and services. Most established businesses also have an online presence, including a website, social media followers, and referrals from online reviews and recommendations.

Trained Employees and Established Vendors

Having trained employees and vendors at your disposal helps your business hit the ground running. Dealing with individuals and businesses familiar with your industry can be invaluable, saving you time and money.

Trained employees offer insights into processes and systems that enhance business operations. Established vendors understand your business cycles and product demands, ensuring they are ready to serve your business without interruption.

The less time you spend hiring, training, and onboarding employees and vendors, the more time you can devote to improving other aspects of your established business.

A Recognized Brand Identity

Another advantage of buying a business is acquiring a well-known brand. Over time, the business has built a reputation through marketing, social media, endorsements, and referrals. It has credibility, and unlike a start-up, it doesn’t need to persuade new customers to try an unfamiliar brand.

Startups Require an Investment with No Immediate Return for Years

Starting a new business demands working capital for operating expenses, such as rent, materials, equipment, advertising, and employee salaries. A start-up also needs to build a customer base, spending time and money on promotion to convince customers to choose its products or services over competitors. That is what we are talking about here. Buying existing companies with cash flow and profit from day 1.

Seller’s Discretionary Earnings (SDE)

As an investor-owner, one of the significant benefits of buying an existing business is the potential for Seller’s Discretionary Earnings (SDE). SDE represents the total financial benefit that a single full-time owner-operator would derive from the business on an annual basis. By focusing on SDE, you can benefit from capital gains rather than relying solely on a traditional salary. This approach can be particularly advantageous if capital gains are more aligned with your financial goals and investment strategy.

What’s In It for You as an Investor?

While buying an existing business offers numerous advantages, it’s important to recognize that this path isn’t for everyone. It requires a blend of skills, a strong network, and solid business acumen. However, many can still benefit from this trend. As a reader, you could consider becoming an investor and gaining access to private equity (PE) micro-cap opportunities with lower ticket sizes. These investments often offer higher returns, especially if you choose the right partner to co-invest with.

By co-investing and partnering with experienced investors, you can leverage their expertise and resources, making it easier to navigate the complexities of business ownership. This strategy is particularly appealing if you have a longer investment horizon of 3-10 years. It allows you to benefit from the growth and success of the business while minimizing the risks associated with starting from scratch.

Our team has access to funding, family offices and direct investment, including the investment types as described above. If you are interested in any introductions, do feel free to book a call.

Word of warning

This article is written for educational purposes and should not be considered financial advice. Always consult with a financial advisor before making any investment decisions.

Buying an existing business offers numerous advantages over starting from scratch. If you’re intrigued by the possibilities and want to explore potential investments within my network, let’s connect and discover the opportunities together! Any investment means your capital is at risk, even not investing nowadays (as even financial institutions like banks, countries and currencies, incl. crypto, can fail).