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When you live in a “silicon valley” hub of any industry, you tend to get overwhelmed by all of the new startups driven by brilliant ideas and seemingly eager investors. While most people will acknowledge that investors accept the low probability of “grand slam” success with all their investments, they still are eager to play the risk-reward game. Historically, 2 out of 10 investments yield the grand return. Three out of 10 breakeven and nearly half simply fade away.
Consider an idea that secures a sponsor who is willing to invest $5 million in its startup. I’ve seen and heard where folks will run out of that money before they get to the proof of concept stage. And if they do get to the proof of concept stage, they seldom have the cash to get to the breakeven stage.
Enter the 40 to 60-year-old business that is not as glamorous as the latest high tech, healthcare business. However, its owners are ready to retire, have developed a business that, in its tired state, generate recurring revenue of $1.5 to $2.0 million while producing positive cash flow of $200,000 to $500,000. And it’s probably operating at 20 to 30% capacity. Consider breathing new life into the business and simply doubling revenue with the understanding that the fixed costs are already covered. If the gross margin is 40%, then incremental income from doubling the revenue will bring all the gross margin to the bottom line. In the above example, increasing revenue by $1.5 million could generate $600,000 in additional cash flow.
Now, consider the learning curve to get such a company up to the next level. As a new owner, you acquire a business that already has cash flow and, in this case, a fair amount to cushion any dips in profitability due to learning curve impact. Other than the cost of invested capital, the likelihood of increasing profitability is significantly better than the traditional startup.
So, the question remains, where are those with an entrepreneurial spirit who are willing to take an existing business and grow it, especially when the risk factor is significantly less than a new startup?
For further discussion and commentary, feel free to contact me at firstname.lastname@example.org.
Richard A. Miles II
CAPSTONE Business Advisors LLC
205 Powell Place