Adding it Up
Buying a Business vs. Starting Your Own
When an entrepreneur is ready to invest in a new business, they must make a fundamental decision: do they start from scratch or purchase an existing one? Creating your own company certainly seems enticing. You’re able to build out a location to your specifications, hire employees of your choosing, and form the business exactly how you want it. But what are the associated costs? Is it really the best value for the money?
Rachael Rand, Market Development Specialist with The Firm Business Brokerage, said when they meet with a client who is interested in selling their business, the first step is to determine what type of valuation is appropriate. If the cash flow isn’t that high and a valuation based only on hard assets doesn’t fit, then The Firm can perform a Cost to Create valuation. “We want entrepreneurs to know if they’re interested in starting a business, it’s often better to purchase an existing turn-key than to start one,” Rand said.
"If you're going to make a significant investment, why not put it into a business that will give you something back from day one, rather than cost significantly more to start from scratch? We help make that happen."
- Rachael Rand, Marketing Development Specialist with The Firm
An example would be a sub sandwich shop. Rather than pay a $250,000 start-up franchise fee, a buyer might be able to purchase an existing franchise at a fraction of the cost and pay a much lower franchise transfer fee. Money is also saved on purchasing furnishings, signage, inventory, hiring new employees, and developing a marketing campaign to get customers in the door. All of those would already be in place.
Typically a Cost to Create valuation is performed for businesses that have been in operation less than three years, franchises—especially those in saturated markets, and businesses that have a number of assets but may be low on cash flow or have multiple locations. “Lenders always prefer to work with an existing business that has some history rather than with a start-up,” Rand said.
Last year nearly 20% of the deals The Firm closed were Cost to Create valuations. “People don’t always realize that buying an existing business is a viable option,” she said. “If you’re going to make a significant investment, why not put it into a business that will give you something back from day one, rather than cost significantly more to start from scratch? We help make that connection.”