So You Want To Be A Millionaire...

MRSB Partner Lloyd Compton on why buying a business might take you one step closer

Ok, so a million dollars is not what it used to be. However, when we think of what it means to be a millionaire, we think of financial independence and the ability to be the master of our own destiny. If you examine how most financially independent people acquired their wealth, it was through owning, operating and often selling their own business. As comedian Steve Martin once said, "You too can be a millionaire. First, get a million dollars."

So, if you are looking to achieve financial autonomy but you don't have a rich uncle with a two-pack-a-day habit, you should become a business owner.

The next question you may ask is, "Should I buy a business or start my own?" There are pros and cons to each option and they are not mutually exclusive. Starting a business typically means you must try to take market share away from someone else. While this is done all the time, it is also fraught with risk and expense. We have all heard the pessimistic and discouraging statistics that say 50 to 95 percent of new businesses fail within their first five years.

An alternative to starting up your own venture is to buy an existing business that has survived its initial growth period. CIBC estimates that approximately 30% of all business owners will exit their business in the next five years due to the average age of this demographic. This number is expected to jump to 50% in the next ten years.[1] Here are just some of the benefits of acquiring a business rather than starting from scratch:

  • There is less risk if proper due diligence is done
  • There will be an established market for the business' service or product
  • You will acquire the previous owner's property or location
  • Years of advertising are already in place and public awareness has been created
  • Credit and relationships with suppliers has been established
  • Immediate cash flow is almost a given
  • Financing will be easier due to a more predictable revenue stream
  • You have the option to work with a pre-existing, knowledgeable staff
  • You can draw on the experience of the former owner
  • You may be able to to get assets at their depreciated value rather than buying all new

 

Of course there are potential downsides; the business may be struggling or may have cultivated a negative reputation among customers or staff. You may have to pay for goodwill or the future cash generating ability of the business, something you would not have to do if you started your own. However, if the earnings are proven to be reasonably stable and predictable, paying for goodwill should be worth it.

So whether you start your own business or buy one, each will require risk, money and hard work. But either course of action can have significant rewards in the annual revenue stream and/or a valuable asset to sell when you decide to put your feet up and retire or move on to the next promising venture.

By the way, Steve Martin's second suggestion when the tax man comes collecting was to simply tell him, "I forgot to pay the taxes." Personally, I don't recommend this.

 


[1] CIBC In Focus, Inadequate Business Succession Planning—A Growing Macroeconomic Risk