Is it easier to buy out an existing company, or start own?

SylvestreW · Feb 15, 2010

There are a few of us who are ready, willing and potentially able (financially etc.) to venture out on our own. We can start a business from scratch (with some clients we have) however another option is available.

There's an existing company - a 3 man team, with the original owner who's in his late 60s and potentially interested in retiring soon. We can approach him and essentially join him/buy him out.

The benefits I see with this are
1) his company is established so less paperwork & admin, not to mention equipment & infrastructure
2) we gain his client lists along with our potential clients
3) we automatically have a "name"
4) he has two existing employees.

The downsides I see are
1) costs are higher since we eventually have to pay for whatever his company is valued at. This means we can't start in our "garage" to minimize costs.
2) whatever "reputation" his company has - we inherit (both positive & negative)
3) he has 2 existing employees

4) we will never really be a "new" company in some of our guy's eyes i.e. we didn't start it from scratch.

So, for others who have ever faced this decision, how did you decide?

This is very preliminary. We haven't approached the other company yet so it may all be moot if he decides he doesn't want to sell/partner or his price is out to lunch.

I just want to hear some thoughts.

-
Syl.

http://www.aercoustics.com

brandoncdg · Feb 15, 2010

As starting a company at the down of this economy and being busier than other established companies, I say go for it on your own. Though I told my partners if we can do well enough I wouldn't mind our goal of trying to sell the company to someone else down the line. I can't imagine buying an established company being very cheap though, and probably not something a start up should do. I think you generally merge with someone else once you made your own company a decent size.

Civil Development Group, LLC
Los Angeles Civil Engineering specializing in Hillside Grading

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PeterStock · Feb 16, 2010

Does the owner have something to teach you before he sells out? If so then it may be worth while.

Peter Stockhausen
Senior Design Analyst (Checker)
Infotech Aerospace Services

http://www.infotechpr.net

Ron · Feb 16, 2010

SylvestreW...you've thought through most of the positives and negatives of such a deal. One other thing to consider is their standing in your specific business. Assuming they are a service business (consulting vs. manufacturing), you're not buying assets (they probably have few...maybe a small amount of equipment), you are buying "goodwill". If they are unique in your area and it would take you a long time to equal their reputation, then it might be a consideration. If not, don't buy the headache...go on your own and work to establish yourselves. There's a good chance that if the owner is ready to retire, so is his business.

stanford94 · Feb 16, 2010

if you buy him:
1. get a very good lawyer & accountant
2. make sure you know who his customers are before you buy him
start asking around about his reputation (that's the only thing you have at the end of each day).....
3. don't be afraid to make changes in the way he's operating
4. keep him on retainer / use part of the buyout money to make sure he's part of the operations for a period of time. make sure you and he do the "meet & greet" of EVERY customer.
5. are you buying payables and receivables? is this a stock purchase?

GregLocock · Feb 16, 2010

A friend of mine looked into buying an existing business and decided that almost universally the disparity between what the current owner thought it was worth, and what he thought it was worth, was unbridgeable.

Also what happens to liability for current or past work?

Cheers

Greg Locock

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SylvestreW · Feb 16, 2010

This is all quite preliminary since I only heard through the grapevine that the other guy wants to retire. May come to nothing..

If he is serious, I would certainly find a way to have him stay on for 5+ yrs, to transition the clients & spread the costs.

The company itself has a decent reputation and been around since early 90s, but since it's always been a small operation (even smaller now), it's definitely not that well known. It's a consulting operation but my field is very niche with not more than 10 players in the province. About 6 major companies (major being >15ppl) and the rest being small 2-4 man teams.

Going the "new" route, it will be "easy" to be stay self-employed, but growing to a self-sustaining level will be incredibly difficult.

pcronin · Feb 23, 2010

You should think about the start up costs, computer hardware/software/licensing, liability insurance, health insurance, office space, misc office expenses. In this current economy you need to concern yourself with cash flow. In a normal senario for a decent sized project, you have a month of work before it is billable and you should get paid within 60-90 days. Are you bringing non-partner level staff with you that will require a paycheck?

Are you able to float all of the above expenses for 4 months without taking a paycheck? Will you be able to get the insurance needed to work on larger projects your existing clients may give you? How long can you sustain the business until you really start turning profits? 1 year, 2 years, 5 years?

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Is it easier to buy out an existing company, or start own?

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