Newsletter #0024

Happy Sunday!

Today I’m covering my framework for deciding when to buy vs build a new business. I hope you love it.

‍

A couple items of business before we begin:

  1. I started a free private Facebook Group to post off market RV/MH Park deals that my team comes across. Wanna join? Please do here! My team finds new deals every month and only snag 5% of them for ourselves, so the rest will go in this group. I’m also hoping that others will post deals as well.
  2. I would love for there to be some pre-submitted questions to my call in show. If you have any nagging small business question that you’d like me to answer, please submit it here, and I will! You can choose to ask me yourself on the show or for me to answer it anonymously. This is meant to weed out any questions that might not be as helpful or interesting to the listeners and to make the show flow better.
  3. You can find recordings of these public consulting sessions here: YouTube - Spotify - Apple Podcasts. The one we had 2 days ago won’t be edited and on those platforms until Monday but the unedited audio is here. 7 more weeks to go!

‍

People often ask me, “Is it better to build or buy a business?”

Like many things, the answer is “it depends.” But that’s not a helpful answer. So let me provide a clear way of looking at both options.

The following 6 factors must be considered before you answer this question for yourself.

‍

  1. Is the business easy to understand? Is it simple? Tree trimming is simple to understand, which means when considering this factor alone it’d be a safer business to build or buy. The cost of failure is much higher when buying a business vs starting, so most of these 6 factors center around that. Buying a 6-8 figure complex business means that you often don’t know what you don’t know. You might even have some industry experience, but the more complexity there is, the more moving parts there are to consider. And if you’re like me and have crap attention to detail, that could really come back to wreck you.
  2. Startup cost. How much will it cost to open this business from scratch vs buy an existing one? If you want to own a restaurant you’re much better off buying. You can commonly buy restaurants for less than what the owner paid for the equipment and buildout. Here’s an example in Austin. This restaurant (and many others on Bizbuysell) will likely close within 3-6 months if no one buys it.
  3. The opposite is true in the pet cremation space. We were looking at spending $700k to open a pet cremation facility from scratch because the equipment is so niche and expensive, but instead we elected to buy one that already has $255k EBITDA for slightly more than that. (That deal ended up falling through, however.)
  4. Industry experience. If you’ve been in the same industry for a decade, you’re more likely to have success if you build OR buy one, like the tree trimming example above. But I’d rather only waste time and a little bit of money, than time and a lot of money and a lot of layoffs.
  5. Leadership experience. Buying a business means walking into a building full of existing employees that will immediately look to you for guidance. In a startup, you at least have a chance to learn and practice with new employees as you hire them. And in the beginning, it’s just you. Who cares if you’re a crap leader? (Side note: Crap leaders don’t know they’re crap leaders, just like stupid people don’t know they’re stupid.)
  6. Sales experience. If you buy a company that hits hard times, you have the ability to pick up the phone and get some money in the door. REVENUE SOLVES EVERYTHING (my next forehead tattoo). If you start a company and you can’t sell, then you simply go get a job. Or you get a cofounder that can.
  7. Product or service? I’d rather buy a company that sells a product than start one. Bringing a physical product to market is freaking hard, even if you don’t manufacture it yourself. There’s a reason the phrase “Hardware is hard” is thrown around in Silicon Valley, Also, building a software product is pretty hard, too. If you buy a company you get to walk right into that once the hardest parts are already done. Service businesses generally have less complexity and startup costs. In other words, any idiot can do it! Myself included!
  8. Time to launch? I’m not a fan of building a company that sells a product or service that takes months or years to fully bring to market. When you buy a biz in that category you get to skip the line. Skip the headache. Cashflow on day 1. That sounds nice, right?

‍

I know you’re cringing at all of my gross generalizations, but I’ll keep typing regardless.

Keep in mind, my general opinion is that riskier business should be started, not purchased. In this tech-driven world, the cost of failure in most startups is near zero.

‍

If I go out and buy a $1m business, the cost of failure is $1m. The mere idea of that gives me anxiety. Sure, there are exceptions based around deal terms such as seller financing, earnouts, etc, but you get the point. If you buy a business that ends up failing, you not only waste your money but you waste your time and opportunity cost as well.

‍

I like to use the below 7 point scoring system for evaluating if we should buy or build a company. Keep in mind, the 1-5 grading scale is designed for higher scores to mean BUY and lower scores to mean BUILD. That’s why some of them might not make sense on the surface.

  1. Simplicity. 1 is very complex and 5 is very simple
  2. Startup costs. 1 is very cheap and 5 is very expensive
  3. Industry expertise. 1 is brand new and 5 is a 20 year veteran
  4. Leadership experience. 1 is none and 5 is 20 year veteran
  5. Sales experience. 1 is none and 5 is 20 year veteran
  6. Product or service. 1 is product heavy and 5 is service heavy.
  7. Time to launch. 1 is short and 5 is a long time

‍

Let’s say we have a 20 year restaurant industry vet that finally wants his own restaurant. Here’s how he’d evaluate his decision:

Restaurant:

Score - 26/35. Verdict: BUY

‍

Bitcoin Mining Facility, Chris Koerner:

Score: 24/35. Verdict: BUY.

‍

Side note, time to launch was a VERY heavily weighted factor here. It was going to take 9-12 months to build a Bitcoin mining facility. A LOT can happen in crypto in 9-12 months (and it did), so even in retrospect buying was by far the best decision. We got to skip the line.

‍

FB Ads Agency, 22 Year old:

Score: 14/35. Verdict: BUILD

‍

Does that make sense? Closer to 7 = build and closer to 35 = buy.

‍

I’m somewhat concerned about the ETA (entrepreneurship through acquisition) and search fund models today. In order to be a successful ETA-er you need to be good at all of the above:

During search:

Post close:

‍

But the problem is that many searchers don’t know how good they are at half of those things until after they buy the business. Furthermore, most searchers don’t have the skill to find a good business to buy in the first place!

So oftentimes the best leaders can’t find a business and the best finders/marketers have no leadership experience.

‍

Only 2/3 of searchers actually go on to acquire a company, but the 1/3 that fail often spends 6 figures of their own or investor’s capital in that pursuit that ultimately goes to waste.

Of the 2/3 that do actually buy a business, how many of them succeed? I don’t have that data, unfortunately.
‍

Conclusion

Try to use this scoring system when asking yourself this question and tell me what you think.

I firmly firmly believe that 100% of people reading this can find time to build a startup in their spare time. yes, even alongside a full time job, kids, church and pick basketball.

There’s always time, guys. I promise you. Parkinson’s Law is REAL. Watch YouTube, look at SMB Twitter, read this newsletter and start gaining skills and putting them to work.

‍

If you can’t find the time to build then how can you find the time to buy?

‍

There is a place to buy. i’ve done it myself! I’m going to do it again. But in a vacuum I think building is the better option in the majority of cases.

You can do this. I promise you.

‍

Top Tweets of the Past Week

  1. Tree Net Biz
  2. Allsup’s Gas Stations
  3. We Closed on our RV Park
  4. Sober Living Housing Investing
  5. There are Still Deals on Bizbuysell

‍

As always, thanks for reading!

Chris Koerner
chrisjkoerner.com

Contact Me