The best reasons to buy an existing business rather than start a new one
with Pete Seligman
The benefits of buying a business over starting one
In this episode our special guest, Pete Seligman, explains a number of benefits to buying an established business rather than starting a new business from scratch.
1) We explain the benefits of buying a business over starting a business.
2) Why the pandemic will present us with so many opportunities to acquire great companies.
3) Why the word entrepreneur needs a reset to recognize business owners who are the Forgotten Entrepreneurs.
Pete Seligman – LinkedIn Profile
Peter Seligman – Alpin
Today we welcome Peter Seligman, who is the co-founder and executive director of Alpin. Pete has an impressive track record as a practical entrepreneur. Pete is qualified as a civil, structural engineer who spent quite a few years designing and managing projects. He moved into investment banking, spend some time in property management and operations. About seven years ago, with a good friend, Iain Morris, he founded Alpin. The main purpose behind founding Alpin was to acquire a business and operate a small business and the full scope of responsibilities and accountability. They acquired SRO technology which they still own today. Through that experience it opened their eyes to the opportunity to help others become exposed to owning small businesses through acquisition.
Links and resources for buying a business.
What’s involved in buying a business?
In any small business acquisition environment, you need three parts:
1) a business where the existing owners want to sell either in whole or in part.
2) some investors, whether that be yourself or others
3) And then the third part of the equation, which I think is the most critical part, is the entrepreneur.
The entrepreneur who wants to run the business.
In America, they use the term entrepreneurship through acquisition, a whole realm of entrepreneurship that I think gets overlooked.
I’d like to hear your opinion on this because you are an entrepreneur. That is the reset of the word entrepreneur because it’s been kidnapped. So what’s your thoughts about that?
I’ve only started using that word entrepreneur over the last six months in a repetitive way. And, I think that it was when I was trying to reflect on a description of what I do. The best definition of entrepreneur that I’ve come across, and it’s quite simple.
It’s someone who takes on risk in the hope of reward, and I think that is a nicely generic phrase that opens the definition of an entrepreneur to a range of activity.
That could be
1) startup activity
2) could be acquisition activity
3) intrapreneurship that sometimes we hear about within the ecosystem of large corporates.
Entrepreneurship through acquisition
Over five or ten years, being labelled as an “entrepreneur” unfortunately became sexy. People using that label as a badge of honour was a little bit overused. I’m not saying there are people in that sphere that aren’t real entrepreneurs, but I think that there’d be many people after the reward that didn’t necessarily take on the risk. In my view, to be a true entrepreneur, you need both sides of that equation; you need to have taken on the risk, not just be looking for the reward.
For my education, I looked at the background of the word entrepreneur. It’s been around for years, like, hundreds of years, and it’s a macroeconomic term. And there was much debate in traditional economics around what it was that made up economic and social development.
There’s talk about the three components of labour, capital and resources or effectively people, money and things that you need to undertake any economic or social activity.
But the way the entrepreneur came to light was that there was an argument that there is a missing catalyst. And that catalyst is the entrepreneur.
The word entrepreneur needs a reset
The definition of an entrepreneur is someone taking on financial risk in the hope of profit is simple. There’s no mention about digital, no mention of venture capitalists and no mention of Silicon Valley.
As you alluding to earlier, the current market environment across the world is rethinking its supply chain and how it’s going to piece together those different parts of the puzzle. And in that environment, things like manufacturing and advanced manufacturing and robotics and even things fundamental to supply as fabrication will be revisited. And when they get revisited, they’ll get revisited by a new generation and using a new lens, which is exciting. If we can inspire some entrepreneurial spirit in those realms as well, I think there’s a huge opportunity.
Yes, absolutely. I think of it like sleeping talent, and we need to wake that talent up. What do you think the Forgotten Entrepreneur looks like? What is this mythical person that we’re talking about or who are they?
The Forgotten Entrepreneurs are here
I think entrepreneurs come in all shapes and sizes; that’s what’s so exciting about it. Some of the most unassuming people in our community are the most entrepreneurial. If that’s the way you’ve operated for most of your life or career, it’s easy to forget how entrepreneurial you are. Anyone who owns or operates their own business is immediately an entrepreneur because there is risk there, and you own that risk holistically.
And obviously, you’re hoping for a reward because that’s the reason you’re doing it. So I think that there’s a necessity in the entrepreneurial spirit of any business owner. I think that there are also people in, in society, who are entrepreneurial in how they inspire activity amongst others. You know, there are entrepreneurs and not for profits; there are entrepreneurs in local community groups. I think those people are thinking about the risk that they might need to take on in trying to commit a group of people to an activity that should be rewarding for the whole.
Seeing opportunities and dealing with the fear of failure
So I think that it’s about being flexible in how you do things and thinking about outcomes, but delivering in real terms daily. I think there used to be an approach where, if you were to describe being an entrepreneur, it was either owning a Ferrari or having ten failed businesses behind you. So it was almost like you’re either a multimillionaire or repetitive failure. And either of those definitions created the definition or the imprint of entrepreneurship. Now you can be an entrepreneur and own a Ferrari. And you can also be an entrepreneur and have failures.
But they, in their own right, don’t define the term. I like the authenticity push that’s coming through the community, but the business world is a lot more behind the scenes of entrepreneurship. So I think that something missed previously was how much hard work, blood, sweat, and tears go into most successes. Now it’s much more common for people to realize that it does take the quintessential ten years to become an overnight success. And I think that that’s a great thing. And the reason why I think it’s great is not just because it’s lifting the veil, but I think it might help to inspire others to try, or even try again.
Buying a business in entrepreneurial
So, for example, there might be people out there that could be entrepreneurs and could be great entrepreneurs and to the scope of your podcast about buying a business. There might be people out there who would be great candidates to acquire a business and own and operate. But they’re concerned because the only definition of entrepreneurial activity they’ve seen is either extreme success or extreme failure. Whereas if they can start to see that actually, there’s just good solid hard work, a bit of risk-taking in a measured way, and a commitment to following through, they might be willing to try. Then if they try and fail, but then there’s enough discussion in the general community about how even successful entrepreneurs failed on their journey. Then that same person might be willing to try again. So I think lifting the veil to what real entrepreneurship looks like, the most exciting outcome about that, for me, is the way it might inspire those latent entrepreneurs that are out there to have a go.
And then, so let’s just for a second, for the audience, who might not have thought about buying a business. So talk us through what you see, the key benefits of buying a business over starting a business. They keep hearing and are constantly fed information about startup all the time. Well, let’s just rebalance that. Why would you say buying or acquiring a business has merit?
What are the best reasons to buy a business and not start one?
1) Your self-awareness, personality and strengths.
Some people are startup people, and some people aren’t. And I’m not a startup person. I’m more than happy to help other people who want to start up a business think about what their business might need to look like to grow and scale. But I’m not the kind of guy that’s going to take an idea and then startup businesses from scratch on this. That said, I guess we did that with Alpin. Self-awareness comes down to which parts you think you enjoy? And what are the elements that you think you’re good at? And how can you contribute value to a business? From my point of view, the bits that I’m good at is making things operate well, and looking at ways of scaling and growing and looking at ways of building teams and developing people. And so those things have much more relative value to an existing business than they are to a non-existing business looking to start.
2) Having cash flow is a massive benefit.
If you can identify a business that has been operating for a period that has:
- good trading history
- a customer base with good attributes like diversification with a good solid customer base, blue-chip, if possible.
- a good team of people that have some history with the business.
So you’ve got some reliability in that ability to deliver. That creates a real platform without building the scaffolding. Such a business is an existing stable platform with a “beating heart” that you use. So it gives you a bit of a run up on this opportunity to operate a business, and you do not have to go back so much before you go forward. There are some real benefits in buying an existing business because you can touch and feel it a little bit before getting involved.
You’ll never learn nearly as much about a business before you own it as what you do after the purchase. And literally, that goes from the day before you bought it to the day after you bought it. So due diligence is pretty essential, and you need to get good at that. But it’s amazing what you learn when your hands are taped to the wheel. And there are always challenges in that, but that’s part of the risk, right? That’s part of the enjoyment in that entrepreneurial risk you’re taking in the hope of reward.
So I think that buying an existing business rather than starting one up for yourself, I’d say it’s just, it probably boils down to the word momentum. There’s a little bit of momentum that you can leverage to get your hands on the wheel and take it forward.
3) Baby boomer business owners need to sell
There are so many great small and midsize businesses that don’t have a good enough succession plan and will fall by the wayside if we can’t build a viable community of entrepreneurs that are willing to run and pick them up.
Baby Boomers have been very successful founders, owners and entrepreneurs over the last 50 years. And as a result, we’ve got numerous good quality, small and mid-sized businesses that are scattered frankly, across the globe, but definitely in our markets here in Australia and New Zealand, which don’t have good succession in place.
There is generally a buildup of businesses without succession in place that either need help designing their succession to transition or need an acquisition. So ownership can transition to a new custodian or custodians. And I think that what’s happened this year, which is quite an interesting dynamic. Six months ago, most people would have been forecasting that their 2020 financial year would be one of their best on record.
The pandemic may prompt some owners to sell
Whereas obviously, 2020 has become potentially one of the worst years on record for economic development. And, therefore, I think there will be many owners that will have quickly changed their minds. And, as you said in your intro, that’s not a reason to raid those companies and look for excessive bargains. But it is a reason why there might be more vendors as they have been through quite a few global shocks.
So I think that if you’re on the buying side of the equation, and you’re interested in getting involved, I think this year, there’s going to be some good opportunities. And I think there can still be some very reasonable ways to enter those transactions such that the vendor gets a good and fair deal through that process.
What are the transferable skills you might need to buy a business?
Just going back to the people side, it suggests to me that there’s probably in the economy at the moment a whole group of people with management experience or leadership experience in other business. Who might not have thought about owning their own business, but they might have a skill set that would predispose them to be very successful.
And I think that if you look deep and hard at what your transferable skill set is:
- dealing with people,
- understand the financial and operational numbers,
- understanding core business processes
- picking apart markets to find opportunities,
- negotiation skills.
These are all transferable skills that you might be applying in a particular realm that might be a perfect attribute for acquiring a business. And if you get the right team around with the right partners in place, anything’s possible.
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