Entrepreneurs face a myriad of challenges when embarking on their business journey. First and foremost lies the buy vs build dilemma – should one buy an existing business or build one from scratch? As the entrepreneurial landscape evolves, search fund investing has emerged as a compelling option for those leaning towards entrepreneurship through acquisition. But how does it compare to starting a business of your own? In this article, we delve into the pros and cons of buying and building businesses in today’s market.
What is Search Fund Investing?
Gaining traction in the entrepreneurial sphere, search funds have become a beacon for those eager to lead an established business. A search fund is a niche private equity vehicle that connects emerging entrepreneurs with a team of seasoned investors, in order to buy, operate and grow a small-to-medium enterprise (SME).
With the help of investors, the entrepreneur (or searcher) raises capital to finance the search and eventual acquisition of an existing, cash flow-positive business. Post acquisition, the entrepreneur steps up as CEO to ensure growth under new leadership.
Pros of Buying an Established Business
Reduced Risk
With a search fund, entrepreneurs tap into a safer pathway by investing in already-established businesses, typically those that have been operational for at least five to seven years. These entities have not only survived the tumultuous early phases but have also showcased adaptability by overcoming various challenges typical of startups.
Healthy Cash Flow
Acquiring a business means stepping into a realm with a predefined customer base. This ready-made audience can translate to immediate and reliable cash flow, bypassing the initial hurdles of attracting clientele. While acquisitions acquired via search funds often encompass a debt element, this robust cash flow can facilitate the expedient repayment of this debt, enhancing the returns for both entrepreneurs and investors.
Access to Existing Infrastructure
Beyond tangible assets, acquiring a business offers a trove of other benefits. This includes inheriting a seasoned workforce, established supply chains and other operational infrastructure. Existing middle management can offer tremendous support, mentoring new hires and ensuring organisational continuity. A matured sales pipeline assures investors and lenders of the company’s potential for growth and capability to fulfil debt obligations.
Cons of Buying an Established Business
High Initial Cost
The acquisition journey isn’t without its financial hurdles. To launch a search fund, the partners must first raise enough capital to cover the overhead costs of a search. Once the searcher has identified a business to acquire, investors must then raise the equity required to fund the acquisition. Depending on the target company’s characteristics, seller debt or bank debt may be used to support the acquisition, usually accounting for 20-40% of the total purchase price.
Integration Challenges
It’s one thing to acquire a business, but integrating it with your vision is another thing entirely. Existing operations, team dynamics and even the company culture may differ substantially from what you envision. This may involve overhauling systems, retraining staff or confronting resistance from a team used to doing things a certain way. A change in leadership can sometimes unsettle a workforce, leading to initial productivity drops or even staff attrition.
Legacy Issues
Buying an established business always has its unknowns. While due diligence can uncover many issues, some problems only come to light once you’re at the helm. These could range from undisclosed liabilities and reputational challenges, to hidden operational inefficiencies. Addressing these legacy issues can be time-consuming, costly and often subvert growth initiatives.
Pros of Building a Business from Scratch
Creative Control
Starting anew offers unparalleled freedom. When you start afresh, every decision, from branding to business strategy, is yours to make. You can ensure that the business aligns closely with your personal values and vision. There’s no existing template or pre-set trajectory, allowing for genuine innovation and the opportunity to disrupt markets.
Lower Initial Investment
While established businesses come with a hefty price tag, starting a new venture might offer a more modest entry point. Without legacy issues or old commitments, there’s a clean financial slate. Entrepreneurs can also explore various funding avenues tailored for startups, from venture capital to crowdfunding, granting them more flexibility in how they finance their dream,
Personal Growth and Learning
The journey of building a business from the ground up is transformative. It’s more than just profits; it’s about growth, learning and the indelible mark of personal achievement. Each challenge faced and overcome contributes to personal growth, building not just a business but a seasoned entrepreneur.
Cons of Building a Business from Scratch
Uncertainty and Risk
While liberating, starting a new business carries a lot of uncertainty. Without a proven business model or market validation, entrepreneurs tread uncharted waters. This comes with the inherent risk of misjudging the market, overestimating demand or facing unexpected competition. The unpredictability and inherent risks of startups can be daunting, both emotionally and financially.
Time to Market
While acquiring a business offers immediate market access, building one from the ground up can take longer. From product development and market testing to establishing a brand presence, the road to market can be lengthy. This means sustaining the business until it becomes profitable and a potentially longer wait for returns on investment.
Lack of Established Relationships
Starting from scratch means establishing new connections and relationships. When you build a business it’s up to you to find industry contacts, negotiate supplier contracts, win over loyal customers and establish credibility in your industry. This initial stage can be arduous and demanding.
To Buy or To Build – That is The Question
Your entrepreneurship journey is deeply personal, as is the choice between buying and building a business. Ultimately, the decision hinges on your individual circumstances, preferences, aspirations and risk appetite. If you need help deciding which path is best for you, reach out to the team at Vital Addition. Our outsourced finance team and taxation services handle your business’s financial intricacies, allowing you to channel your efforts into maximising its potential.