IT’S NOT A STARTUP; IT’S A JUMP START – PART 2: ADVANTAGES OF A JUMP START OVER A STARTUP
By Steve Mooar
Manhattan, NY, August 19, 2005 – This article takes a look at the advantages of a Jump Start over a Startup when creating a new venture. It is Part 2 of a 5 part strategy series on the Jump Start. If you missed the Introduction or Part 1: What is a Jump Start, they can be viewed at www.bizplanhelp.com/blog/blog.html. Part 3: How to Get Started will cover the strategy for putting a Jump Start together.
While defining the Jump Start in Part 1 of this strategy series a couple advantage were pointed out including:
- Speed to Market
- Lower Cost of Assets
- If purchasing an active business, Cash Flow from Day 1
- Brand Recognition
In this article I will cover these advantages more in depth as well as introduce other areas were the Jump Start strategy gives the entrepreneur advantages over a Startup.
Speed to Market
One measure of success for any company is how quickly it can turn research, development, and other investments into revenue generating products and services. The longer a company has to spend money on development without revenue the more pressure is put onto cash flow, particularly for a startup. In other words, Time is Money.
In an extreme example, lately in the technology industry it is not unusual for a startup to be in stealth mode for a year or more while developing a product. The company has not generated revenue, so the R&D process is being supported by outside funds putting pressure on the entrepreneurs to bring a successful product to market before running out of funds or going out for another round of financing. Since the dot com bubble it has become more difficult for companies to go out and raise additional rounds of funding and the cost of the funding from an ownership stand point has also greatly increased.
If the entrepreneur of the stealth mode startup can find a strategic acquisition they can alleviate some of the cash needs if the strategic acquisition provides one or more of the following:
- Technology or knowledge that speeds up R&D process
- Product(s) in the target market
- Existing Customers that would be interested in the stealth product resulting in a quicker initial sales cycle
Cost of Assets
I recently worked on a project for a startup car leasing company. Their Jump Start Strategy was to acquire for pennies on the dollar the assets of a rental car business that was shutting down. Included in the assets were a phone system, network equipment, and computer system with accounting and fleet management software specific to the car rental and leasing business. The street value of the software alone was $30,000 and the hardware would have cost another $30,000. In addition they received a customer list of primarily local customers.
In the Car Leasing case, the rental company was going out of business, so the assets were being liquidated. When assets are being sold under distress, they generally sell for 5% to 25% of the book value or originally price depending on the asset. If the assets are being sold under a normal course the assets could be sold for 50% to 100% of book value or original price. In a transaction like this a Fair Market Value (FMV) is calculated, which will be covered in Part 4 of this series Financing the Acquisition. The bottom line is that if you are buying assets from a distressed seller or under normal conditions you can negotiate a price that less than what it would cost on the street.
JUMP START HINT: Take a look at eBay and other auction sites for buying assets below cost. Computers, raw materials, manufacturing equipment, and whole companies are available on auction web sites.
Cash Flow
One of the biggest concerns of a startup is cash. When will the venture start generating cash? How much of investment is needed until the venture is cash flow positive? The two previous Jump Start cases both resulted in decreasing the time to cash flow even though that was not the primary objective. The Technology Jump Start decreased its time to market, therefore decreased its time for generating cash. The car rental company decreased the time it would take to setup the infrastructure, therefore decreasing the time for generating cash.
If cash flow is the entrepreneur’s primary reason for considering a Jump Start, a good point to start is by looking at companies available in the same industry. If the entrepreneur is looking to open a store or restaurant, check if there are any for sale in the area. By buying the existing business the entrepreneur has sales from day 1. Also, one will be better prepared since the business’ financial history is available prior to an acquisition.
Brand Recognition
Many white papers, articles, and books have been authored by marketing gurus on building brands. Also, many financial and accounting types have also chimed in on how to put a value on brands. Having more of a Operations background, I consider the marketing people to be witch doctors working with smoke and mirrors. Even though I do not try and understand how the marketing people do it, I understand the importance of a brand. How great would it be if Eagle Strategy Group had the same recognition as Nike or if my Business Plan Program was as widely known by the public as Apple’s iPod.
I am sure your Jump Start Strategy does not include buying Nike or Apple, but any existing business you buy has a brand attached. The current and past customers, as well as anyone else that has had contact with the business during its operation, know the business and its products; therefore there is a brand. No matter the size of the business being acquired do not underestimate the power of the brand or the customer list. Putting the brand and customers into the hands of a savvy witch doctor will result in revenue.
JUMP START HINT: When performing due diligence on an acquisition target inspect the customer list for complete contact information.
Other Advantages
Here are a few more advantages that make the Jump Start Strategy a good alternative for the entrepreneur:
- Experienced Personnel – you are buying a business with people who have lived it everyday.
- Financial History – anyone that has tried to get a business loan knows that it is much easier when there is history.
- Supplier Relationships – customer lists were already mentioned in this article, but suppliers can be just as important, particularly for manufacturers, wholesalers, and distributors.
Conclusion
The 3 biggest advantages of a Jump Start are Speed, Speed, and Speed. Jump Starts go-to-market faster, raise money faster, generate cash faster, and do everything else faster than a Startup. All the advantages that help the entrepreneur move faster during the startup phase, give him the resources to do what he does best – CREATE VALUE.
About the Author
Steve Mooar has over 10 years experience in Operations and Information Technology and has worked on numerous Startup and M&A projects. He is the president of Eagle Strategy Group, which provides Strategy Consulting Services to small and medium sized businesses. Eagle specializes in developing strategic solutions in Operations, Information Technology (IT), Startup, and Merger and Acquisitions (M&A), as well as provides interim management support. For more information go to www.eaglestrategygroup.com.
