A buyout seems a more effective solution
It surely depends on the concrete situation we are referring to. In times of crisis, what is already “built” costs less than “what’s still on the drawing board”. In a nutshell, a buyout seems the right way than a start-up, says Ghenea (photo).
“Taking a glance into the real estate industry during this housing crisis, my question is: what would you do if you had the money to buy a household? Would you rather dip your feet into an already built house (for which you can snap up the deal at a bargain price), or would you buy a house that it is very likely to lag on the drawing board? I would buy the house already built, even if it hasn’t been perfectly constructed and needs improvement or repairs. If I paid the money for a house under construction or pending for construction works, I wouldn’t be sure of how functional it would be, how much it would cost, and maybe the initial costs would turn out to be lower than the real ones”, he explained.
From here to the comparison between buying out a company and starting up a new one it is one step away.
Same as the previous ‘analogy’, with the real estate market, a buyout of an existent business entails first of all a thorough audit designed to identify the flaws and strengths of the business.
From this initial evaluation, similar to a SWOT analysis – a planning method used to identify the internal and external factors that are favorable and unfavorable to the business – should be enclosed to a clear business restructuring roadmap – you don’t buy a home with construction problems until you know exactly what needs repairs and how much it would cost, says Ghenea. After the acquisition, the plan must be perfectly executed. If these steps are accurately followed, the buyout can enjoy a real success.
“Similarly, in case of a start-up, you have to assess your business as well as to define your objectives. Unfortunately, unlike the case of a buyout, where the audit and analysis are made on a very specific case, on an existent business, account balances, financial results, in case of a start up, the evaluation can only rely on assumptions and benchmarking. Afterwards you are in the position to draft a strategy based on this evaluation and an action plan designed to follow the respective strategy. In the end, everything depends on how much you stick to your strategy”.
Advantages and disadvantages arising in a start-up vs acquisition
As Marius Ghenea notes, a start-up means no predetermined rules or formulas to follow. It gives you more flexibility. Returning to “building a home from zero” analogy, you have more freedom to “think” this house than when you buy one already finished and you have to comply with the restraints imposed by the constructor. As the beam can no longer be modified, the business pattern is well defined and cannot undergo any changes, as it is the groundwork of the business.
The advantages of a business purchase are the following:
1. Lower costs for entering the business arena, in contrast with a startup.
2. Shorter time until the business begins to produce sufficient revenue, because you don’t start from zero, you start with an existent groundwork, whether it’s fragile or sub-optimal.
3. A buyout is much less risky. Theoretically, there is a proven formula, you know what went wrong with that company and the key areas that call for improvement, whereas in a start-up, you only rely on assumptions based on your management skills and expertise.
Disadvantages of a business purchase
1. Restricted flexibility in reshaping the business project. Various elements, starting from brand to purchased fixed assets make up a system already established which you have to use or try to change only if it doesn’t require too much costs.
2. Legacy issues. In a business purchase, you see all type of “ghosts” and “backbones” in the acquired company, and it can be a long and winding road until you chuck them out.
As for areas that could return long-term profits in case of a start-up got off the ground from zero, Ghenea says it is impossible to predict the future profit-making sectors of the industry: “It’s like talking about global warming, because in this case, at least three inherent difficulties could arise in the business”:
1. Cyclicity of business fields both locally and globally. When the oil barrel hit 150US dollar high, market watchers heralded this would be the biggest long-term investment on a global scale, given the presupposed and alarming depletion of fossil energy resources within few tens of years; but now, only one year later and 100 US dollars down, we see things from a different perspective.
2. Business rule issue, according to which the tightening of the competition in a field is proportional to the return of the respective field. More precisely, if a business segment goes very well, more and more companies will emerge and develop until the offer broadens to such an extent that would weaken the return. It can happen the other way around – companies exit from fields that stopped returning any profit, and this would lead to a market balance, with fewer companies sharing the same market.
3. Bubble issue and their negative effect (the outburst of the economic bubbles). These bubbles can occur in many sectors (for example in real estate or dot-com) or general (like before 1929 or before this crisis); you can enter a field with high long-term expectations that could perform excellent but to enter in such a bubble and when it bursts, to send you on the brink of bankruptcy, said the president of Fit Distribution.
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