Buy a Business vs Start a Business?

Replacing W-2 income can be accomplished by delving into business ownership through strategic investments.

From analyzing “How to Buy a Business With No Money in 2023” by Codie Sanchez

In the discourse shared by Codie Sanchez, a compelling strategy for achieving a five-figure monthly income, particularly in 2023, involves acquiring existing businesses using external financial resources. The essence of this approach lies in leveraging other people's money to fund the acquisition of companies. Sanchez asserts that replacing W-2 income can be accomplished by delving into business ownership through strategic investments.

The rationale behind this strategy is rooted in the current demographic landscape, marked by the retirement of baby boomers who own small businesses. Sanchez contends that purchasing an established small business, operational for more than five years, poses less risk than starting a new venture. As Sanchez highlights, the overarching challenge lies in the need for more awareness about this opportunity, coupled with the unfamiliarity of individuals with finding and acquiring businesses, compounded by financial constraints.

Sanchez shares personal experiences of acquiring businesses with minimal upfront capital. For instance, she mentions receiving a laundromat for zero dollars down, which generates an annual cash flow of $67,000. Another example involves a car wash purchased for no money down, yielding a yearly profit of $140,000. Using an SBA loan is presented as a method of obtaining essentially "free money" from the government for business acquisition. However, Sanchez underscores the potential downsides, such as the debt burden and structured processes.

Additionally, Sanchez explores alternative avenues for securing capital, including seeking funds from friends and wealthy individuals. Despite the difficulty associated with this method, Sanchez highlights the potential benefits, such as a more flexible negotiation process, lower cash requirements, tax advantages for the seller, and customizable deal terms.

The concept of seller financing emerges as a pivotal strategy. Sanchez explains that seller financing allows business owners to receive their purchase price and interest in installments. This approach facilitates business transactions, potentially bridging the gap between sellers and buyers. Examples illustrate instances where businesses were acquired with partial down payments, resulting in substantial monthly profits.

In essence, Sanchez advocates for recognizing the opportunities inherent in purchasing small businesses and underscores the importance of mastering negotiation techniques, particularly in securing seller financing. The overarching theme revolves around using other people's money strategically to enter the realm of business ownership and generate profitable returns.

Why buying small businesses is a great strategy

Reduced Risk: Acquiring an existing small business, mainly one operational for more than five years, is portrayed as a lower-risk endeavor than launching a startup. The established companies being targeted have a track record, existing customer bases, and proven revenue streams, mitigating the uncertainties associated with startups.

Immediate Cash Flow: Purchasing an ongoing business often comes with the advantage of immediate cash flow. Sanchez provides examples of companies she acquired with minimal upfront capital that generated substantial annual profits. This contrasts with startups that typically take time to become profitable.

Experience and Reputation: An existing business already has a built-in brand, customer base, and market presence. This can save considerable time and effort compared to building brand awareness and gaining customer trust from scratch. The reputation and relationships established by the previous owner can contribute to the new owner's success.

Government Support (SBA Loans): Sanchez introduces the concept of utilizing SBA loans as a form of government-backed financial support for buying businesses. This method is portrayed as a way to access essentially "free money" to fund acquisitions. While acknowledging the debt aspect, this strategy can provide a financial boost that is not readily available when starting a business.

Seller Financing: The emphasis on seller financing as a negotiation strategy highlights its flexibility in structuring deals. Sometimes, sellers might be willing to finance the purchase price, spreading payments over time. This reduces the need for significant upfront capital and aligns the buyer's and seller's interests in ensuring the business's continued success.

Faster Return on Investment (ROI): Acquiring an existing business can lead to a quicker return on investment. With established cash flows and operational systems, the new owner can start realizing profits sooner than when it typically takes a startup to become profitable.

Tax Benefits for Sellers: Seller financing is presented as a benefit for buyers and sellers who can enjoy tax benefits. This aspect can make it more appealing for business owners looking to exit and can contribute to more favorable deal terms for the buyer.

Negotiation Leverage: Buying an existing business provides more room for negotiation, especially when using alternative financing methods like securing funds from friends or wealthy individuals. This flexibility in deal structuring might be more challenging in traditional financing arrangements with banks.

Lindy Effect:

The Lindy Effect, which suggests that the longer something has been around, the longer it is likely to continue being around, aligns with the rationale behind acquiring established small businesses.

Sanchez emphasizes that businesses owned by baby boomers, especially those that have been operational for more than five years, present an opportunity with lower risk than starting a new venture. This aligns with the Lindy Effect, as businesses that have successfully operated for a significant duration are perceived to have a higher likelihood of continued success. The stability and longevity of existing businesses become attractive qualities, reflecting the Lindy Effect's principle that what has endured has a higher probability of continuing to endure.

The Lindy Effect is indirectly applied to the strategy of acquiring businesses as a means of achieving a five-figure monthly income. Rather than starting a new company with inherent uncertainties, leveraging existing businesses' stability and track record aligns with the Lindy Effect's principle of favoring entities with a more extended history.

The discussion further explores using other people's money to fund these acquisitions, emphasizing alternative financing methods such as SBA loans, seeking funds from friends and wealthy individuals, and utilizing seller financing. These financial strategies are time-tested methods used in various business acquisitions. In this context, the Lindy Effect can be interpreted as favoring financial strategy with a history of successful acquiring businesses.

In summary, the Lindy Effect indirectly reflects acquiring existing businesses as a path to financial success. Established businesses' inherent stability and longevity resonate with the Lindy Effect's principle, suggesting that what has endured is more likely to endure in the future.

What Stops People

1. Lack of Awareness:

Reason: Many individuals need to be aware of the opportunity to buy small businesses due to limited exposure and awareness from mainstream financial sources.

Solution: Educate yourself and others about the potential of buying small businesses. Utilize alternative sources of information beyond traditional financial channels.

How to Educate Yourself:

Educate Yourself: Explore alternative media, blogs, podcasts, and forums that discuss small business acquisitions.

Networking: Engage with professionals, attend industry events, and join online communities focused on business acquisitions.

Mentorship: Seek guidance from experienced individuals who can provide insights and share their experiences.

2. Difficulty in Finding Businesses to Buy:

Reason: People need help identifying available small businesses for purchase in their surroundings.

Solution: Reframe your mindset and actively seek out small businesses for sale. Networking, online platforms, and industry connections can be valuable resources.

How to Seek Out Small Businesses:

Online Platforms: Utilize business-for-sale platforms, such as BizBuySell and BizQuest, to discover businesses on the market.

Local Networking: Attend local business events, join chambers of commerce, and connect with business owners to uncover potential opportunities.

Industry Associations: Engage with industry-specific associations and forums to identify businesses within a particular sector.

3. Lack of Knowledge of the Acquisition Process:

Reason: Individuals may need help understanding the step-by-step process of acquiring a business.

Solution: Gain knowledge about the acquisition process. Leverage resources and insights from experienced professionals in private equity to demystify the process.

How to Gain Knowledge and How to Leverage:

Education: Enroll in courses, workshops, or online programs that provide insights into the steps involved in acquiring a business.

Mentorship: Connect with professionals with experience in business acquisitions and seek mentorship to guide you.

Professional Advice: Consult with business brokers, attorneys, and financial advisors for expert advice on the acquisition process.

4. Financial Constraints:

Reason: The perception that buying a business requires substantial upfront capital can deter potential buyers.

Solution: Explore alternative financing options, such as seller financing, SBA loans, outside capital, or leveraging your existing resources. Seller financing, in particular, allows for deals with little to no upfront cash, providing a viable solution.

How to Finance:

Seller Financing: Propose a seller financing arrangement where the seller agrees to receive payments over time from the profits of the acquired business.

SBA Loans: Explore Small Business Administration (SBA) loans that offer favorable terms and lower down payments.

Outside Capital: Network with potential investors or partners interested in providing capital for a share of the business.

Creative Financing: Investigate alternative financing methods, such as joint ventures, crowdfunding, or partnerships, to reduce the need for significant upfront capital.

Cole Hover, is a Finance Student at University of Arizona, Eller College of Management

Categories: Funding