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Something old, something new?

Written by Josh Russell on Wednesday, 31 July 2013. Posted in Finance

Deciding whether to start from scratch or purchase a pre-built business can be a tricky call

Something old, something new?

It’s fair to say that, in post-recession Britain, more and more people are interested in owning a business. As headcounts have been slashed, people are yearning for the sense of controlling their own destiny. Given that entrepreneurialism is the order of the day, it can often be tempting to assume that launching your own Reggae Reggae Sauce or creating the next Trunki is the route to success. But, in the world of business, is breaking new ground all it’s cracked up to be? Or are the tried-and-tested formulas for success truly the best?

As with many decisions in life, probably one of the first considerations that will need to be made is around money. While it’s certainly a truism that you have to spend money to make money, there is a disparity of investment between starting from scratch and buying an established business lock stock.

“Effectively, these days, you can start in business for a couple of hundred quid,” says Mark Mills, founder of corporate finance advisors Comerga Capital and business resource howtosellacompany.co.uk. “You can buy a limited company, you can set up a website, you can be trading within a day or two.” A business undeniably will require a lot of capital to grow, but – when buying an established business – the purchaser will be effectively reimbursing this capital in one go, rather than in an organic manner.

But it’s not all about the money; the decision is also often dependent on how much creative input an individual wants in shaping their business. “If you do it on your own, it’s vanilla or pure,” comments Mills. Inevitably, a start-up is going to give you the kind of creative freedom that an established enterprise can’t – a factor that often sets entrepreneurs apart from other successful business owners is that they’re attracted to the idea of having a completely blank slate.

Obviously, the flip side of this means purchasing a business about which many decisions have already been made; while this offers less freedom, an established business model offers more security and you have a functioning business from the get-go. Mills continues: “Going into something with some momentum is going to cost you more but actually you’re going to get there quicker.”

One of these circumstances is more likely to appeal than the other, depending on personal preference. Nicholas Gill, CEO and co-owner of specialist furniture supplier David Phillips has experienced both sides of the coin. Having an extensive background as an investment banker and a mergers and acquisitions (M&A) adviser, he’d spent plenty of time purchasing and investing in businesses. “But I wanted to make the change from being an adviser to being the principal,” he explains.

He made the decision to start his own investment banking firm, allowing him to carry over his previous experience and still spend time investing in and acquiring businesses. But the journey helped him realise something rather fundamental.

“Going through the process of starting that business confirmed my belief that I’d rather buy a business than start a business,” Gill says. In part, this was because of the high failure rate of start-ups; by contrast, in an established business, it was easier to assess elements that were successful and identify those that needed improvement. He explains: “The important thing for me was that I didn’t have that burning conviction of an idea or a business model.”

However, it’s not just about what the new owner is bringing to the table. Inevitably, the success of a deal for an existing business is going to hinge much more on what happens after each party signs on the dotted line. While buying into an established enterprise can save on the hard slog getting the business into a profitable state, the legacy transition between an entrepreneurial founder and an owner executive won’t automatically be a smooth one.

A lot of attention is given to carrying out due diligence around the numbers when acquiring a business, but Mills feels as much attention needs to be given to considering the transition between the personality of the old owner and one’s own. “If the old owner has been charismatic, they’ve had the vision, they’ve had the passion, not everybody will necessarily buy into the new owner’s version of that,” he comments. However, this definitely doesn’t need to be viewed as a negative and often the culture imbued by the business’s founder in actuality can potentially set the tone for the future. 

After his experiences setting up his own enterprise, Gill made the decision to purchase an established company: David Phillips. And while picking up where its founders – David Heller and Phillip Scheiner – left off could have been an intimidating proposition, he actually found it to be hugely supportive. “Phillip is a fairly remarkable individual – because it had been a start-up, they’d imbued the business with a really strong ethos and sense of purpose,” Gill explains. “That really helped the transition period between their ownership and mine. In the early days when I had to make a decision, it gave me a very strong touchstone as a point to base my decision-making on.”

That’s not to say there are no risks involved. Whether an individual is starting a company from scratch or acquiring something down the line, both involve no small amount of danger and can come packaged with pretty serious losses if they fail. But is one inherently more risky than the other?

“I have a different answer than most people,” admits Mills. He feels that, despite the uncertainties involved in launching a start-up, you are required to rely solely on your own efforts and your own drive. “When you start up on your own, you’re in a bit of a bubble of enthusiasm, your own charisma and your passion,” he says. “Whereas, if you buy something, you’ve always got that risk of there being something in the background.”

While it might be easy to slip into complacency because you have carried out plenty of due diligence, to some degree you are still having to rely on and trust in another person. 

Gill gives the example where he might be buying a business in which 20% of the revenue comes from one single client. That client could have informally let slip at one point that they were considering changing their service once the contract came up for renewal and the owner decides it might be time to beat a quick retreat from the business. “They never tell me, they never write it down anywhere; it’s completely unprovable,” he says. “As the new owner I get in, day one, bang: 20% of the revenue’s gone.”

But, sometimes, the route you go down just isn’t something that can be reasoned through. While you can mull over risks and revenues almost indefinitely, sometimes it really is simply a question of temperament.

Gill makes reference to a friend of his who is almost his opposite in temperament: a serial entrepreneur who is on his fourth business. “He is a guy who absolutely has to do things his way,” he explains. “The reason he likes starting businesses is that he has an idea; he’s convinced about it and compromise is just not what he’s in it for.” Conversely, Gill prefers to learn from the processes and implementations of others, improving or replacing things that don’t work rather than throwing out the baby with the bathwater. “My view is that different people have different ways of approaching problems and you can take enormous positives from that. You look and you say, ‘actually, yeah, that’s an interesting way of doing it.’”

Ultimately, whether looking at starting up an enterprise or acquiring one at a later stage, both form a vital function in the business ecosystem and require different, albeit complementary, skill sets. Making the decision about which is the best route for you is important, but, of course, what really matters is what comes afterwards. And that, rather than which fork in the road you take, is what makes a successful businessperson. 

About the Author

Josh Russell

Josh Russell

Our former editor, Russell was the man in charge of properly apostrophising our publication and ensuring Oxford commas are mercilessly excised. Our former digital doyen, he’s also a Photoshop pro, a dab hand with InDesign and the man to go to if you need a four-hour soliloquy about the UK's best silicon startups.

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