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The Hidden Truth: Buying a Business Will Save You Money

September 30, 2021 Justin Farmer Comments Off

Running your own business is challenging.  It requires hard work, long hours, blood, sweat, and tears.  But in the end, very few experiences are as rewarding.  And there is no better way to go into business for yourself than starting from scratch, right?  Wrong.  What if I told you that you could acquire a turn-key operation, skip all the heartache and pitfalls that accompany starting from scratch, and it would both (a) cost you less to get started and (b) put money in your pocket right away?  Still not sure? Then let’s take a look to see how it pencils out.  Below is a high-level comparison of your Start-up vs. Acquisition costs for a business that is valued at $500,000.

Acquisition Cost Savings (Not Cost) – Acquisition:  As I have written in the past, the Small Business Administration (SBA) lending process works superbly well for small business acquisitions ($3M and under).  Later, I will be publishing another article on the loan process itself, but in the meantime, here are the key numbers you need to know:

  • Down Payment:  The general rule of thumb is 10% of the purchase price.  You can pay more and there are exceptions for qualified borrowers that permit at 5% down payment, but for this article we will the standard, which would be $50,000 in this case.
  • Debt Service:  The typical loan term is 10 years.  So, with interest of approximately 6%, you are looking at an annual debt service (payments to the bank) of about ~$50,000.
  • Your Total Compensation Walking In:  Conservatively, a $500,000 practice should be running about 50% overhead.  So, after all operating expenses are paid, the business should net close to $250,000.  That means $250,000 to the owner: YOU!
  • First Year Net: ~$150,000.  That is right.  After the down payment, debt service, and paying all of the operating expenses for a $500,000 business, you will still take home approximately $150,000 in your first year.

Keep in mind that in the first year of an acquisition, every expense should already be covered by the existing production of the business.  You don’t need to worry about fronting the costs of rent, a website, printing, insurance, office supplies, your salary, or just about anything else.  That is why an operation is called “turn-key”: you literally just walk in and start making money.

Estimated Total Cost – Start-up: $50,390 to $90,390.  In comparison, below you will find the out-of-pocket expenses you could expect in your first year starting from the ground up (i.e. “hanging a shingle”).

Rent:  If you are going to “hang a shingle”, you will need a space to do your work and meet with clients.  But don’t forget that when you rent, you have to put up a damage deposit, there is likely an application fee, and other one-time expenses and improvements to the space.   With an acquisition, the space is already there for you.

  • Start-up Cost: $2,500
  • Monthly Thereafter: $1,000
  • Total Estimated Start-up Rent: $3,500
  • Cost Savings with Acquisition: $2,500

Website: Yes, you have a presence on LinkedIn and Facebook (which are free), but you will need a website, logo, letterhead, and firm name that you can begin to integrate with those networks.   When you acquire a business, you need only tweak the messaging moving forward at a nominal cost.

  • Estimated Start-up Cost: $3,000
  • Cost Savings with Acquisition: $3,000

Office Supplies & Computer: You need to have a computer, office supplies, a desk, printer, and the other tools to actually run the practice.  

  • Estimated Start-up Cost: $1,900
  • Cost Savings with Acquisition: $1,900

Phone System: What type of phone system will you have?  Maybe a new smartphone that integrates with your office phone and fax?  Not super expensive perhaps, but it adds up.

  • Estimated Start-up Cost: $900
  • Cost Savings with Acquisition: $900

Health Insurance: Depending on your family size, this will vary drastically.  But you still need to set this up, one way or the other.

  • Estimated Start-up Cost: $1,000
  • Cost Savings with Acquisition: $1,000 (already figured in the overhead costs)

Corporate Filing Fees: Nominal, yes, but still a start-up cost.  And, if you hire an attorney to draft your corporate documents, such as Bylaws, Articles of Incorporation, and Operating Agreement, the cost will be even higher.

  • Estimated Start-up Cost: $250
  • Cost Savings with Acquisition: $250

Technology: You will need to figure out how to track your clients (client management software like Clio starts at around $40/month), and how to keep track of your expenses (QuickBooks online starts at around $30/month).  Depending on your business, you may need more as well!

  • Estimated Start-up Cost: $70/month
  • Cost Savings with Acquisition: $70/month (already figured in the overhead costs)

Salary: Depending on your circumstances, you will want to bank away anywhere from six (6) to 12 months of salary to cover your first year, or approximately how long you can expect to be in the red when starting your own practice.  If you need, let’s say, $80,000 per year to live comfortably (i.e. pay your mortgage, bills, and other obligations), then:

  • Estimated Start-up Cost: $40,000-$80,000
  • Cost Savings with Acquisition: $40,000-$80,000

Now, if you take the estimated start-up costs above and add that to the opportunity cost to you of starting out on your own, versus an acquisition, you are looking at a between $200,000 and $240,000 difference.  I am no mathematician, but acquisition sure looks like the better business decision to me.

Sure, you could likely cut your expenses down from what I have listed above when it comes to rent and other potential expenses.  You can run lean and grow gradually.  But the most often overlooked cost of starting out is what you actually pay (or can’t pay) yourself in your first year.  It is very rare for a small business owner to start out making a living wage on day one.  Everyone is different, of course, and you may be starting out with clients in hand, but you may very well still experience a “loss” in your first year, or even two, as compared to acquiring a business.

You will also see that the cost of employees is noticeably absent above.  If you ever want to expand, then you will need to hire employees.  And if you have ever had to hire, or fire, an employee, you know that staffing can be the most challenging part of running your own business.  And, frankly, it is the most costly.  Did you know that the cost to a small business for hiring, and then firing, an employee is approximately twice that person’s salary?  But with a “turn-key” operation, you will often have loyal employees that are literally worth their weight in gold – and who will sign employment agreements with you as the new owner as part of the acquisition

There are certainly other expenses that go with starting a business that I have not listed.  That being said, this article is not meant to be a guide to starting a practice with incredibly accurate numbers. Rather, it is meant to call your attention to the prudent business idea that is an acquisition.

So, what is it going to be?  Which would you rather do?  It seems to me that if you have the financial security to start your own business and forego a year’s worth of salary establishing a start-up, doesn’t it make more sense for you to spend a little bit more of your money upfront and instead acquire a business that will instantly start giving you a return on investment?  To me, the numbers simply speak for themselves.

2615 Jahn Ave NW Suite E5, Gig Harbor, WA 98335 info@privatepracticetransitions.com +1 (253) 509-9224
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