Why Buying a Company Can Be Better than Starting One

Perhaps your most fundamental career choice is whether you will work in someone else’s company or for yourself. But for most people, “working for yourself” sounds a lot like “starting your own business,” which feels risky and formless and also requires a really good business idea — which most of us don’t carry around in our back pocket.

But there is a third choice: You can buy an existing business, right now, and run it as CEO. We call this entrepreneurship through acquisition, and we’ve been studying it with our students at the Harvard Business School.

The most successful entrepreneurs through acquisition we’ve seen look for businesses we call enduringly profitable, businesses that are more likely to have a stable income over time. They also are attractive to the lenders and equity investors who provide funds for your acquisition. Rather than flashy, fast-growth tech companies, these are firms that share two characteristics which on the face make them seem dull — but that actually make them enduringly profitable:
If you’re considering entrepreneurship by startup, that path involves building a company from scratch, without knowing whether the product or service is something that can be the basis for a profitable business. When you start a company, before you make any money, you need to develop a product or service, identify potential customers, figure out how to deliver the product or service to the customers, hire all your workers, market to customers, build a management system, and then hope the product or service is something customers want to buy at a price high enough for you to make a profit. Buying an existing, enduringly profitable business is less risky — not riskless, but much safer because the product or service is already established and, if you buy the kind of company, likely to produce steady cash flows while you focus on improvements and growth.

• Recurring customers. The essential characteristic of enduringly profitable smaller businesses is not that they have a rapidly expanding customer base; it’s that they have recurring customers. These companies are able to attract and keep the right customers, those who value its product or service and will purchase year after year. For example, in 2015, Jennifer Braus bought Systems Design West, which serves hundreds of municipal firehouses in the Pacific Northwest by handling billing to insurance companies for their emergency ambulance transports. Her systems and the firehouses’ quickly became intertwined, and they naturally fell into a smooth working relationship month after month. As a result, Systems Design West retains virtually 100% of its customers year in and year out.
• Slow growth. Although high growth might seem like a wonderful characteristic of a business, it comes with high risk. High growth means that your new customers will quickly outnumber your existing ones. New customers are, well, new — they have no loyalty to the company and no history, and they may very well bring new demands. A rapidly growing firm also attracts competitors, which see the expanding market and the opportunity to attract new customers. Low growth, in contrast, means low risk, and low risk is great because it is your money at stake. Things just move slower in an established business that is growing slowly; you’ll have time to build lasting relationships with your customers. You’ll learn what they value, and you’ll adapt to find products and services they appreciate. Greg Ambrosia bought the leading commercial window washing business in Dallas, which grows slowly because new high-rise buildings are added to the Dallas skyline slowly. His existing customers appreciate his superb safety record and excellent service and use his company year after year, generating a stream of predictable, recurring revenue. Meanwhile, he steadily adds additional services and customization that serves his customers’ needs ever better.

Running your own company offers a radically different career path and career lifestyle from working in a traditional large corporation. It allows you to lead an organization, make decisions that matter, and have the flexibility to work in a way that suits you best. By buying an enduringly profitable, slowly growing firm, you can marry the opportunity for professional independence with the stability of buying an established, enduringly profitable smaller business.

This article was written by Richard S. Ruback & Royce Yudkoff. To read the original article, click here.

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