Buying vs starting a business - which is better?

What’s better - buying a business or starting one from scratch?

Which ones make more money? What sets you up for profitability much quicker?

I’ve tried both methods and learned which is best. Here’s what I’ve found…

Businesses I’ve bought and created

• I BOUGHT the Blue Boar Hotel for £2.2 million. It’s a hotel, pub and restaurant.
• I STARTED Twizzle Tops Day Nurseries from scratch. We’ve now got 10 venues.
• I BOUGHT the Rossi Ice Cream Parlour in Southend, Essex, for £1.2 million.
• I STARTED Teddy Tastic Bear Co from scratch. We’ve made millions of teddy bears and accessories. We distribute them wholesale and consumer-based all over the country and throughout Europe.

Hopefully, that gives you a flavour of some of the deals I’ve done in my career thus far.

But I want to give you the pros and cons of starting a business and/or buying one.

First of all, let’s break down the steps of my career.

Right now, I’ve got 1,200 staff members, £40 million revenue, 17 different brands to look after.

But it didn’t start like that.

I was a magician and children’s entertainer, swapping my time for money. I was really worried that, if I got ill, I’d have no income.

Therefore, I set up an agency, where I got other entertainers and DJs and took a margin. That was okay, but it was still a profitable job.

Once I started hiring out equipment, it just became an even bigger profitable job. The income was okay, but I wanted to reach the higher echelons of entrepreneurship.

My next big step was to open a family entertainment centre, to bring my customers to me. That business earned around £1 million revenue and £100,000 profit in its first year, but I’d borrowed a horrific amount of money to get it going.

I borrowed so much that I was landlocked and unable to borrow any more money to continue growing my business. That was very frustrating, back in 2007, as we also had the financial crash to contend with.

I wanted to grow my business because I felt we had a really good model. I tweaked it to add day nurseries, to provide more income using existing overheads. Brilliant!

Then, I looked for businesses to buy. I thought: “I can just go and buy other companies, and tell the owners I’d pay them over an extended period of time.”

I bought some businesses out of administration and liquidation - after they’d gone bust - and introduced better business models.

At that stage, I started buying businesses without any money. But they had huge problems. They were very stressful turnaround situations.

The next stage was to buy good businesses.

Fast-forward to today, I’m continuing to start businesses from scratch, but I also buy way more profitable businesses to vertically-integrate them into the ecosystem. Or, as I like to call it, my existing empire.

That turbo-charges profitability, while saving me money on overheads.

What are the pros and cons of buying a business?

Pros:

• History. Proof of concept is especially important if you buy businesses that are more than 10 years old. Only 5% of businesses make it beyond 10 years, so if you’re buying something that’s had a decade of trading, you’ll find there’s a lot less risk involved.
• Management. Sometimes, you can leverage a really good management team into your existing business. Or you can leverage that management into other opportunities. Do not discount this. Entrepreneurship + Management = Success is the biggest driver of profitability. You don’t want to manage your business - you want to be the bleedin’ entrepreneur, growing your business.
• Vertical Integration. What if you could buy a business and integrate it into your existing one? For example, I was buying £250,000-worth of ice cream every year, so I bought an ice cream manufacturer. That can be a huge cashflow saver.
• Profitability. You might be able to buy a property when you buy a business. For example, since I bought the ice cream company and a hotel, I own all these freeholds on the back of a trading business.
• Funding. It’s much easier. When I bought the Rossi Ice Cream Parlour, I managed to borrow the money for that very easily - because it was 100 years old and the last five years of accounts showed £250,000 annual profit. High Street banks LOVE funding stuff like that. What they don’t like is funding start-ups. More on that later.

Cons:

• History. This can also be a negative. There may be skeletons in the cupboard, such as unpaid HMRC bills, or a big insurance claim that you don’t know about. If you haven’t started it from scratch, you don’t know the warts n’ all of the business.
• Systems. Maybe the team isn’t good enough. The business could be about to lose a big customer or contract, and you don’t want that.

This is just a seasoning of the pros and cons of buying a business.

If you’re buying something that’s more than 25 years old, you’ve got a much better chance at staying in the game.

The businesses I’ve bought over the last five years have tonnes and tonnes of establishment around them.

Let’s now look at the pros and cons of starting a business

Pros:

• It massages your ego if you are successful. You can say, “look, I started this - isn’t it lovely?” For some people, that really gets them going.
• It teaches you. That’s one of the best things. You learn about compliance, how hard business is, how to get planning permission, the inner-workings. If you do go on to buy a business, you can then implement all that knowledge to help you make the right decision.

Cons:

• Huge failure rate. The rate of failures for start-ups is absolutely astronomical. Because of that, they’re hard to fund. Go ask a bank - they hate funding start-ups. They want to fund something that is a tried, tested and proven model.
• It’s really difficult.
• You can’t pay yourself, while the business gets going. I didn’t pay myself for years, as the business was sucking up so much cash. It took about 8 years before I could have some time off.
• No time. Start-ups are time vampires, stealing lots of time from us.

But which do I prefer?

Starting a business from scratch might massage your ego, but most of you will absolutely fail. I know this because that’s what the data tells me. I know how flipping hard it is.

The really smart thing to do is to go and buy really good businesses, where you can see easy upside, and leverage your management team.

“Leverage” is the big daddy in entrepreneurship. I don’t just mean in equity or property, which is what most people think.

“I’ve got a £1 million property and only a £100,000 mortgage, so I’ve got £900,000 that I can leverage,” they say.

Forget that. Everyone knows that.

Leverage is so much more. Can you leverage brand, systems, intellectual property, software, database, or management? I’m always looking for opportunities where leverage plays a part.

For example:

• I bought a hotel and I run all my seminars there. I sell my ice cream there. My food services business supplies all the food and drink we sell.
• I set up a teddy bear business, so I sell the teddy bears at my farm animal adventure parks.
• I bought an arts and crafts business, and I sell all those arts and crafts to the people who buy my teddy bears.

Leverage, leverage, leverage.

I’m also looking for businesses which earn more than £1 million in annual revenue, where I’m buying into an existing management team, and there are systems and processes which can help me grow my existing businesses.

If I see a business which is making money hand over fist, just because it’s been established and does zero marketing, I say: “Yes!

“Yes, it’s an opportunity for me to bring my marketing team in to grow that business.”

I don’t want to buy micro-businesses. I want profitable businesses that have been around for at least 10 years.

My next big piece of advice to you is to buy businesses which have no customer concentration. That means there’s no one big customer.

You don’t want any more than 10% of your revenue to come from one source.

“One” is the worst number in business. One location, one revenue stream, one product, one key member of staff. And the worst one: one big customer.

I live by the phrase: “A little bit of money from a lot of people, a lot of the time, will keep you in business.”

Customers do go bust. They may die. They may move away. We don’t want customer concentration.

If you’re thinking about starting a business from scratch and you’ve got one good client, your job - before making the leap into entrepreneurship - is to dilute them as much as possible. That may be by buying other companies or learning the skillset of marketing, so you can get more customers.

What do you think? Is it better or worse to start a business from scratch? Let me know in the comments!