An Alternative to Starting from Scratch

The other day, I wrote about mitigating risk as an older entrepreneur launching a startup. My suggestion was to focus on an opportunity where you develop skills and relationships that will be helpful in garnering future employment opportunities in case your startup fails. But even in the best circumstances, the cash flow that you can personally generate is likely limited to 10% of the total capital you raise. And the likely scenario for most startups fortunate enough to raise capital is an initial “friends and family” round of less than $1 million. If the CEO’s salary is 10% of the total capital raised, then you’re likely to be making $100,000 or less per year.

How else can you undertake an entrepreneurial venture while still generating a significant amount of capital? You might consider buying a business.

If you’re apprehensive about starting a business because you don’t have much in savings, the prospect of buying a business may seem scarier still. But buying a business doesn’t necessarily require putting up your own capital. There are plenty of institutions and high-net worth individuals who would finance the right acquisition. Just as importantly, there are many businesses that make sense to acquire and grow.

Types of Businesses to Consider

Of the millions of apps and websites in existence today, the overwhelming majority will run out of cash and eventually close their doors. Most of their founders will be receptive to opportunities to sell, but that doesn’t mean that these companies are right for you to acquire. An app with no revenue and a small user base usually has no value. The business may also cost a significant sum of money just to maintain.

There are also instances of sites or apps with significant traffic where the owners haven’t figured out how to monetize the traffic, usually because it’s too small to command sponsorship deals. Others have found success aggregating media properties to achieve the scale necessary to generate advertising dollars, but that type of strategy– usually referred to as a “rollup”– is a more complicated proposition than what I’m focusing on here.

There are two types of businesses that I would suggest looking into: offline businesses with huge online potential and online service-based businesses.

1. Offline Businesses with Online Potential

There are plenty of offline businesses that successfully sell local products, whether it’s a company selling crafts, local foods, or even specialized machinery. The owner might be making a comfortable living and is unfamiliar with the opportunities afforded by digital marketing and national or international distribution. Either that or they may be unaware of effective strategies that they could use to transition their companies to sell online.

If you can identify a business like this and then construct a business plan that contemplates massive expansion through Internet marketing, you might be onto a great opportunity. The risk proposition associated with introducing a new product into market will be largely reduced, as the owner should have already validated consumer interest in their product. Therefore, you can focus on profitably acquiring new customers through paid digital marketing channels.

2. Online Service-based Businesses

In the offline business example, you’re looking for an opportunity where you can apply new marketing channels to a successful business.

The online service-based business opportunity is often about applying new sales muscle to an existing digital business. There are many talented design firms, app development shops, and even SEO and SEM companies that never scale beyond a relatively small size. Why? Because while their owners are talented at their crafts, they have virtually no management experience and no knowledge of how to build a sales funnel. The result: while the gross billings may be high, virtually nothing drops to the bottom line and the business is constantly treading water in terms of its financial position.

What’s the Upside of Acquisition?

Acquiring a business requires you to create a business plan, similar to how you’d create a business plan for a new startup. If anything, you need to substantially sharpen your pencil when it comes to projecting an acquisition’s cash flow and detailing your marketing and sales efforts. Often, your fundamental thesis is that subtle tinkering can have a profound impact on scaling the business.

Who Will Invest?

In a near zero interest rate climate, there are many investors looking to diversify their capital where their returns can be substantially higher than if they were putting money into savings accounts. For a small acquisition (less than $1mm), you’re likely approaching the same friends and family investors who you would otherwise be approaching if you were financing a startup. For a larger acquisition, you’re likely approaching a private equity firm that is in the business of financing similar types of deals.

How Much Money Can You Make?

In the startup scenario, your salary is capped because the business isn’t making any money while you’re trying to get it off the ground. It looks unseemly for you to take a large salary when you’re starting with 100% of the business and you’re asking others to follow your entrepreneurial dream.

In the acquisition scenario, it may be that the majority of the business is owned by your investors. More importantly, you’re likely looking for a business where your salary is coming from the cash flow of the business instead of from the capital that you’re taking from investors. Based on the size of the acquisition, you could make substantially more money– a salary potentially competitive with what you could have earned at a job. The difference is that you’re the CEO and as a much of an entrepreneur as the person who started their company from the ground up.

The Takeaway:

  • For older entrepreneurs who are risk-averse, acquiring a company may be a better option than launching a startup from scratch.
  • 2 good options for acquisition: offline businesses with online potential & online service-based businesses with growth potential.

– Andrew

Read part I here.

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