Two significant trends are evident in entrepreneurship at present: post-pandemic, Americans are starting businesses at a record rate and the “Silver Tsunami” of Baby Boomer-owned businesses is already here as that generation begins to retire.
The numbers are astounding. Business Insider notes that “Americans filed 5.1 million new business applications in 2022, according to US Census Bureau data, equating to roughly 14,000 new business applications filed every day last year. It marked the second-highest year on record — down slightly from 5.4 million in 2021 — and remained well above the 3.5 million filed in 2019.” Meanwhile, 10,000 Baby Boomers, who own 40% of small businesses, retire every day. Estimates are that their businesses represent $10 trillion in value.
So, should you start a business on your own, or should you buy an existing business? Let’s look at the pros and cons of both options:
Starting a business: Many people wish to start a business to “be their own boss,” to see their creative vision become reality and to enjoy the fruits of their labor. You truly have a blank canvas. You also have no guaranty of success nor a track record of sales. Capital for start-ups is extremely tight right now, with lenders only funding the best deals and those that are backed by adequate collateral to protect their depositors’ funds – and that often means home equity. Sales typically come in slower than entrepreneurs hope, which will require adequate working capital (or cash on hand) to survive until you reach – and exceed – your break-even point and begin to be profitable. It is common for a new business to lose money for the first 6 months or so. Labor for your start-up will be tight and you may need to take what you can get. Competition in the market can be daunting (and it’s growing, remember). Customers have less cash in their pockets due to inflation. Your vendors and professionals that assist you may make more money that you do at first – we’ve seen businesses where credit card merchant fees alone amount to more than the owner’s draw! And a small business may not be able to provide important benefits such as health insurance or retirement contributions, at least in the beginning years.
With all of those headwinds, there must be some pros, right? Aside from the ability to create your own vision for your future, you can create your own schedule, as well (but note that you’ll hear many entrepreneurs quip that they are free to work whichever 12 hours in a day they want!). You will be compensated for your labor and expertise, rather than it going to a corporation or C suite. Your security and future are in your hands – you can’t be laid off. And you are building something of value. If you leave a job after 5 – 10 years, you’ll get a card and perhaps a grocery store cake. If you build a good business and decide to exit, that business can be sold or transferred to family, a competitor, another entrepreneur or even a private equity group. Cash beats cake any time!
Buying an existing business: An existing business offers a track record of sales, a reputation with current and past customers, employees, systems and vendor / professional relationships. This often means that you can “hit the ground running” with sales revenues being generated immediately. With regard to lending, banks often prefer to fund an existing business acquisition over a start-up, as there will be financial documents to review that will prove the model works. There may also be business assets that will serve as collateral. A great discussion of the opportunity afforded by Baby Boomer businesses for sale was recently published by Forbes: Is Buying Boomer Businesses Now A Smart Move? (forbes.com)
You will pay for the privilege of instant cash flow, however. A small business typically sells for a multiple of the total economic benefit to the owner (often on the order of 1X to 4X) or a fraction of annual revenues. Some business models or industries warrant prices over annual sales. Prices for small businesses, mirroring the overall economy, are up post-pandemic; see: https://www.bizbuysell.com/insight-report/. And you will be making a significant purchase with capital that costs you 5.25% more than it did just a few years ago.
Both methods have their advantages and disadvantages. Seek guidance and run the numbers with your advisors to see which might be the better path. There are resources to assist start-ups, to determine the value of a business and to build a strategy for the future. Either way, entrepreneurship is seeing a resurgence and you can be in the next generation of business owners!
