Black entrepreneurs should consider buying existing businesses more frequently, as opposed to starting from scratch at the pace they do 1. More often than not, starting from scratch presents some insurmountable challenges that lead to 80% of new businesses failing within the first 18 months 2.
Between 2001 and 2014, Black entrepreneurs started new businesses at a rate that far outpaces any other racial group, but also set records in business failure rates 3.
On the other hand, purchasing an existing business reduces an entrepreneur’s risk while creating opportunities for tremendous profit 4. Why continuously reinvent the wheel with such high chance of failure, when you can buy it with significant increase in the probability of success?
Put the Brakes on Reinventing the Wheel
New businesses fail for various reasons, but largely because they must build a customer base, market their product or services, hire new employees, and establish cash flow without a reputation 5. Conversely, a seasoned business with a record of growth, trained employees, a good customer base, proper equipment, and an established inventory are fruitful business opportunities 6. Furthermore, there is reduced risk and a better chance of getting financial backing 7. Most lenders are more inclined to lend money for the purchase of an established business rather than supporting an unknown start-up 8. While there is always the possibility of facing difficulties such as valuation issues, concealed problems, and management conflicts 9, the risk analysis unequivocally favors buying over starting from scratch 10.
In the black community, there are many examples of businessmen and entrepreneurs who made a fortune and had a positive impact on the community, from buying existing businesses. One such example is the late Reginald Lewis, the first African-American businessman to be included in Forbes magazine’s list of the nation’s 400 wealthiest people 11. After 15 years as a corporate lawyer he purchased the McCall Pattern Company—a home sewing pattern business—which he later sold for $65 million, making a 90 to 1 return on his investment 12. In 1987, his billion dollar acquisition of Beatrice Companies—a giant snack food, beverage, and grocery store conglomerate—made it the largest company in the country run by a black person 13.
Before you go out and buy a business, there are some recommended steps that ought to be strongly considered.
Firstly, perform your due diligence. The U.S. Small Business Administration (SBA) asserts that there are items that need to be addressed before entering into any business agreements or transactions. More specifically, obtain all pertinent licenses and permits, understand and abide by zoning requirements, and address environmental concerns 14. It is also advisable to assemble a team consisting of an attorney, a banker, an accountant and possibly a business broker 15. Lastly, be sure to go through Entrepreneur.com’s Checklist of 25 items you should evaluate to verify the value of a business.
While the entrepreneurial spirit may compel one to start a business from scratch, it is wise to consider buying an existing one instead. With the majority of new businesses failing, and overwhelmingly so in the black community, it is far less risky to not start from scratch. We’ve had examples of uber successful black businessmen and entrepreneurs who left a blueprint, and with the countless guidelines available online, such as the ones referenced in this article, A black entrepreneur has plenty of literature to inform their business buying decisions.