New business owners are choosing more than ever to buy an established business rather than pursue the well-worn Kiwi No.8 wire mentality of starting-up a business from scratch.
That is the increasing trend noticed by New Zealand’s industry leader in SME sales, ABC Business Sales, as buyers and entrepreneurs - especially those created from Covid-scenarios of senior redundancies and returning cashed-up expats - are seeking to mitigate the risks of business failure.
In theory starting your own business sounds exciting, invigorating and cost-effective, but the reality is actually quite different - especially the statistical reality, says ABC Business Sales managing director, Chris Small.
“The failure rate for start-up businesses in New Zealand is a shocking statistic, and the challenge for those sorts of businesses with an unproven business model and no trading history has become even greater in this Covid environment. However the success rate for acquired existing businesses are quite the opposite, and it’s a trend that’s becoming more and more pronounced,” says Small.
Statistics NZ shows that nearly half (44%) of start-ups fail within three years, but industry stats show that 90% of acquired established businesses are still operating successfully, three years after purchase.
It’s that risk ratio that helped Fraser Owen decide to buy his Waikato based industrial racking and shelving business rather than start one from scratch like he was planning to do.
ABC Business Sales sells nearly 400 businesses a year, and Chris Small says in their case more than 390 (or 99%) are still operating successfully three years after purchase.
“The average age of the businesses we sell is 10-15 years and that gives them a significant advantage over start-ups. The businesses have existing customer & supplier relationships as well as often being able to negotiate superior commercial and financial terms with creditors, landlords and banks etc given their trading history.”
Five key reasons why existing businesses have a higher success rate
- Existing customer & supplier relationships
- Superior commercial & financial terms with debtors/creditors/leases/banks given the history of trading
- Brand equity that has been built over a period of time.
- The transition training between the existing owner to the new owner (crucial)
- Experienced staff and proven systems/processes
Five key reasons why start-ups have a higher failure rate
- The business model is unproven and inadequate/relevant customer research/history
- Commercial and financial terms will be onerous given the business has no trading history
- Staff, systems & processes are all unproven
- The entrepreneur does not have the relevant experience to successfully start and run a new business
- No brand equity or trading history with the relevant customer base