Buying vs. Building: A Business Broker’s Insight on the Smarter Way to Acquire a Business

For years, I’ve built businesses from scratch.  It was just how I operated.  Find a gap in the market, create something from nothing, and invest myself fully into turning that idea into reality.  And I always assumed that my way was just one of two paths: you either built a business, or, if you’re someone like my friend, you buy one that already exists.

My friend, who I deeply respect, has always been in the business of buying businesses rather than building them from scratch.  Where I see possibilities and potential in ideas that need work, he sees it in things that are already operational.  At first, I thought we just had different instincts and he had a natural eye for acquisition, while I was drawn to the challenge of creating from scratch.  

My Journey from Startup Enthusiast to Property Investor

 Now, it’s worth mentioning that I’m no stranger to property investment.  Over the years, I’ve built up a modest property portfolio, investing in buildings that could generate reliable rental income.  Before every purchase, I’d dive into detailed analysis of Net Operating Income (NOI), financing options, potential improvements, all the standard measures.  And I didn’t just stop at one good deal; I kept studying, reading, listening to podcasts, and meeting with other investors to keep my approach sharp.

The property investment process always followed a pretty specific formula: I’d identify an existing property with good rental prospects, secure financing, make any necessary improvements, and then start generating cash flow from day one.  The income was there from the beginning, and the improvements would only add to the value over time.  It was a model that worked, one that balanced immediate cash flow with long-term appreciation.

The “Build from Scratch” Approach I Took with Business

 But in business?  My approach was entirely different.  Rather than treating it like an investment that should generate cash flow from day one, I dove into startups.  I’d notice a problem in my life or market, gather friends and partners, and start building from scratch, often without any real income from the business at the beginning.

For each new venture, we’d bootstrap it with our own funds, usually holding off on any real compensation for ourselves until the business “could afford it.”  The process was full of uncertainty, countless hours of sweat equity, and the constant tension of managing a cash-tight operation.  In some cases, it worked; in others, I learned valuable (and sometimes expensive) lessons.

The more I thought about it, the more I wondered why I took such a drastically different approach with business than with property.  Why was it that in property, I insisted on cash flow from day one, but in business, I was willing to build from scratch and forgo income for so long?

The Manufacturing Business: A Wake-Up Call

 A few months ago, my business partner and I came across a unique opportunity: a manufacturing business for sale.  It ticked all the boxes for us: a niche product, growing industry, limited competition, and plenty of expansion potential.  For the first time, I thought, “This could be a great addition to our portfolio without starting from scratch.”

We figured it was the perfect moment to try a leveraged buyout. So, we spent days gathering all the documentation; an independent valuation, a detailed information memorandum, financial statements for both the business and ourselves, you name it.  We scheduled a meeting with our banker, feeling confident that we had covered all the bases.

When the banker arrived, however, he brought just a single page: the business’s Income Statement.  In a surprisingly pointed meeting, he explained how the bank viewed this business as an investment asset.  One that, ideally, should be generating cash flow and could grow with incremental improvements over time.  He went on to explain how his bank assesses risk in acquisitions, and that our focus should be on whether the business would generate returns immediately and whether it could service the debt, much like a property investment.

Suddenly, everything clicked.  I was looking at this acquisition like I’d look at a brand-new startup when I should have been seeing it as an existing investment property.

The Key Insight: Buying an Existing Business is Like Buying a Building, Not Building One

Here’s what I realised: when I buy a property, I expect rental income from the first day, and I see any improvements as an added bonus.  I wouldn’t buy a plot of land and spend months or years constructing a building without rental income.  But in business, I’d been doing exactly that, building from the ground up, often with no cash flow to show for my efforts until much later, if at all.

Had I not had this revelation, we might have bought the manufacturing business with the wrong expectations, assuming we wouldn’t need immediate cash flow and could afford to fund any future growth out of our pockets.  Without expecting cash flow, we’d risked overpaying and limiting our ability to pull financial levers for growth down the line.

The Smart Approach: Treat Buying Your Business Like an Investment

The more I reflect on it, the more I see that an existing business has so much in common with an existing building.  Buying a business that already generates cash flow gives you options and flexibility, just like buying a property with paying tenants.  There’s income from day one, and any improvements or efficiencies you bring to the table only add to the value.

For buyers, it’s crucial to approach an acquisition as you would a property investment.  Ensure cash flow is there, look at the financials critically, and understand how this “investment” will serve you over time.

Key Takeaways for Sellers, Too

If you’re preparing your business for sale, keep in mind that buyers are looking at it through this investment lens.  They want something that has cash flow, predictable financials, and growth potential that doesn’t require total reinvention.  To make your business attractive to these types of buyers, here are a few steps to focus on:

1. Clean Up Your Financials: Buyers want transparency. Ensure your Income Statement, balance sheet, and cash flow statements are clear and accurate.

2. Highlight Cash Flow Potential: Think of cash flow as your business’s “rental income.”  Make it clear how buyers will benefit financially from day one.

3. Identify Improvement Areas: Just like you’d upgrade a property, consider highlighting areas where new owners could increase efficiency or revenue.

4. Get a Realistic Valuation: Understand what your business is truly worth. An inflated price without the income to back it up will turn buyers away.

5. Consider Selling to the Right Buyer: Look for someone who sees your business as an investment.  A buyer with this perspective is more likely to value the structure and income-generating potential you’ve built.

By approaching your business sale with these steps, you can attract buyers who think like investors, ultimately securing a higher offer and a smoother sale process.

For anyone preparing to buy a business, I highly recommend getting familiar with these core principles. I’ve put together a guide:  How to value a business in 5 minutes or less. [Get your copy here!]

In the end, I learned that my friend wasn’t just “wired differently.”  He’d figured out that a business, like a property, is an investment, a cash-flowing asset that should offer returns while you add value over time.  Understanding this fundamental mindset shift has transformed how I look at acquisitions, and I hope it can help you approach your own business journey with fresh eyes, too.