The first year of any business, whether you have bought an exisiting business or started one from the ground up, will always be the most challenging. Start up businesses and buying an existing business both have their own challenges. As a start up, no one knows about your products or services, so not only are you heavily invested in developing and refining your product offering, but you also need to heavily market and promote your business. But exisiting businesses have their own root of problems. While it sounds great, walking into a business that already has a steady cash flow and customer base, you are also walking into problems that someone else created.
In my time I’ve done both, started my own business and also bought an exisiting business.While the cash flow of an existing business is great – and can allow you to immediately leave your full time job, you end up spending a lot of time and money fixing the foundation of the business. And by foundation, I mean basic operational issues. Everyone works differently, but when you buy an exisiting small business that has been run by your average mum and dad, the business is heavily reliant on you being present. Why? because it was always intended for mum and dad to work there and you have now become mum and dad in the business.
The first year of buying an exist if filled with understanding the business and then developing policies and procedures that will enable growth and less reliance on you (on the operational side) so that you can focus on strategy and securing a strong future for the business. Unless operational issues are solved, there is no value in trying to grow the business since the foundation would not be able to support growth. This is what I found a core challenge in the business we purchased. While it would be great to innovate and take the business online, the day to day operational process would not be able to support the new sales channel.
The first year of starting a new business was a different challenge. When I started my first business, the hardest part was balancing a side business with full time employment. Then trying to support growth while not having the capital or cash flow to sustain and employ staff. A new business also means refining your product offering. Quite often the first product idea doesn’t work in the market place, so you amend and relaunch your product offering until there is something more sticky with your customers. Most of my time was spent on product development through a feedback loop with customers. When you keep refining your product, you also have to be more mindful of not over promising your product in your marketing. Therefore, you spend less time focused on acquisition and more focus on retention and customer satisfaction.
From my point of you, I loved starting my own business from scratch, but it is a long journey of consistent change with a higher chance of failure. You have to love and believe in your product and have patience. While I made more profit in my own start up, due to control of cost and sales, it is a slower journey and much less stable. I never left my paid employment when I ran a start up business. And even today, I don’t focus on sales or acquisition of new customers. My focus is on product offering and it’s consistent refinement. I’ve never used my start up business as a reliable source of income. Instead, I see it as a child that requires consistent investment to grow healthy and stable. On the other hand, when I purchased an exisiting business, I did leave my day job. The established cash flow and steady income allows you to have more confidence in the business being able to support your time investment. Having the cash flow and the existing customer base allows you to see the opportunities instantly. Refining an exisiting business to enable it to take advantage of opportunities in the market is much easier then establishing a new business. However, the initial investment is huge, compared to a start up. For a business turning over more then 200K per annum, you could look at paying 100K+ depending on profitability. You are essentially buying all the good will and exisiting customer base. Then once you take over the business, you can expect to spend another 100K plus to fix up things that have been ignored by the previous owner. Don’t forget, you need back up cash to maintain the exisiting cash flow of the business.
Start ups can be expensive too, but I don’t believe they need to be. In a start up, you have more control over costs. Usually you don’t have commercial rent to pay yet. You can trial pop up stores, online or selling through exisiting retailers. You don’t need to employ people, you have time to invest in developing the skills you need on your own. When I started my own business, it cost me less then $1,000. The first month I made $20,000 which then allowed me to re-invest it back into the business by hiring my first employee. But starting up your own business means you have greater attachment to the business. You created the product, so you are less likely to want investment that reduces your control. You usually have a vision of where you see the business in the future and seeking capital investors means stakeholders that you also need to now satisfy. Which is why I chose to take the slow road. No investment meant slower growth, but a product I can be proud of.
After experiencing starting up a new business from bottom up and also buying an exisiting business, I realise the unique challenges of both roads. Which ever road you take, no matter what, the first year is the hardest and less profitable. In a start up, you can be profitable by year two but in an exisiting business it may take a few years (since you need to pay off that initial purchase price).