Starting your own business will require that you invest $250,000 to acquire the hard assets that were previously identified in the established business.
If you had bought the business your net worth at the end of 4 years would be $1,150,000, the profit you made of $400K (4 x $100K) plus the value of the business (goodwill) $400K (4 x $100K) plus the value of the assets $250K. In this scenario you would have been much better off if you had started the business rather than acquiring an existing one.
Your bank account |
$ 1,250,000 |
The 1st year you make |
$ 0 |
Value of Business |
$ 450,000 |
Net Worth after the 4 years |
$ 1,525,000 |
When you are acquiring a business the amount of money that you pay in goodwill is the true “risk” money involved in the business. You are counting on the company performing as well as it did in the past with respect to sales and profits.
A major advantage to starting your own business rather than acquiring one is that if you start a business you never have to concern yourself about hidden or past liabilities.
The aforementioned is a very simplistic approach to determining whether or not to buy or start a business, but the exercise should be done. The scenario may also change dramatically if you are looking for financing rather than having the cash in hand. It is much easier to obtain financing for an established business then it is for a start-up, as financiers will always look at profit and cash flow history to gauge the future.
One other interesting scenario is the individual who identifies a business that he wishes to acquire with the view in mind of dramatically changing the business after it is acquired. This may make sense if the location is a very key part of the business being acquired. If location is really not that critical then one should consider why they are paying a substantial amount of money for goodwill when they are not really planning on receiving the benefits of it.
From this point on I will assume that you have balanced the pros and cons of buying an established business versus starting a business from its inception and have decided to look for and acquire an established business.