Decision to Buy a Business in Urban Entrepreneurship: A
Process Perspective and Contextual Influence by Edwin Lee, Theresa Lau and K.F. Chan
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This paper examines the decision making process of buying a business in urban entrepreneurship. A conceptual framework is developed to explain the buying behavior with reference to strategic decision making process. The: rational, emotional and dependent decision making process is hypothesized to relate to decision outcome of buying a business. When making a strategic decision which involves a large amount of money, other contextual factors also affect one’s decision. Among them, economic environment, relevant experience and investment budget are of particular importance. This paper also examines how the contextual factors affect the decision outcome of buying a business. By understanding the interrelationships, we can make a theoretical and practical contribution to the field of urban entrepreneurship, illustrating how entrepreneurial decision making process and the contextual factors are linked to the outcome of buying a business.
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Edwin Lee is the founder and CEO of Hong Kong Business Intermediary Company Limited and a DBA student in Hong Kong Polytechnic University
Theresa Lau is the associate professor at Department of Management and Marketing, Hong Kong
Polytechnic University.
K. F. Chan is the associate professor at Department of Management and Marketing, Hong Kong
Polytechnic University.
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Introduction and Problem Formulation
From a business perspective, the role of cities and urban area are always viewed as drivers of innovation, creativity and economic growth. An entrepreneurial city pursues innovative strategies and is flexible to enhance its economic competitiveness. Hong Kong has a long history of urban entrepreneurship (Jessop and Sum, 2000), entrepreneurial spirit is high and entrepreneurial activities are abundant. People in Hong Kong, like the other big urban city, eat fast, think fast, move fast and change fast. Urban entrepreneurship takes a different form; business start up can also takes an alternate route. Instead of start up a business from scratch which takes time and effort, nowadays many entrepreneurs prefer to buy a business which can save time, money and energy (U.S. Small Business Administration, 2009). Buying business also comes with existing customer base, immediate cash inflow, and reduced risk of business failure
(Steingold 2005). Since it fits the fast city life style, the number of business buying and selling has been drastically increased. Take Hong Kong as example, the number of business transaction through business brokers had been increased 270 percent from 2005 to 2009.

Literature on new business start up and the decisions that lead to the start up were comprehensively documented, but very few studies have been conducted in buying business as a form of entrepreneurial start-up. Given its increasing importance, it is interesting to know how the different strategic decision making process affects entrepreneur’s buying behavior. This paper has developed a conceptual framework to explain the buying behavior with reference to strategic decision making process. The three decision making process in this study are rational, emotional and dependent.

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When making a strategic decision which involves a large amount of money, there are other contextual factors affecting one’s decision (Stevenson and Gumpert, 1985, Alstete, 2002).
Among them, economic environment, relevant experience and investment budget are of particular importance.

In this study, the following research questions will be addressed:

(1) What is the relationship between the entrepreneurial decision making process and the decision outcome of buying a business?

(2) Do these contextual factors: budget, relevant experience and economy environment affect the decision outcome of buying a business? If yes, how?

Main Hypotheses

Timing is of essence to entrepreneurship, especially entrepreneurs in urban area. They often act very quickly to exploit brief window of opportunity (Carter, Gartner, & Reynolds,
1996). Extensive data collections, analyses to calculate risk probabilities and to choose among alternatives are generally too time-consuming (Shapira, 1995) and therefore would lead to the decision of “not buy.”

Rational decision making process includes elements like choosing among best alternatives (Vroom, 1964), bounded rationality (Simon, 1947, 1955, 1983), and entrepreneurial self-efficacy (Chen, et al., 1998). Rational decision making processes require a lot of time for consideration (Pacini and Epstein, 1999, Pfeffer and Jeffrey, 1992). Busenitz and Barney (1997)
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also state that rational decision making requires more time to process the information as compared with heuristic approach that simplifies and speeds up the decision in a risky environment. Such decision making process may delay or result in no buying decision.

Dependent decision is more concerned with establishing constraints and preferences of those involved in and affected by the decision (Pfeffer and Jeffrey 1992), and it is reliant upon the direction and support of others. According to Global Entrepreneurship Monitor Hong Kong
(GEM HK) 2007, it is a common but mistaken myth that 90 percent of the new businesses fail in the first year. Although such believe is grossly exaggerated, it is somewhat supported. Brian
Headd, Chief Statistician of the United States’ Small Business Administration in 2008, shows that 1/3 of new businesses with employees less than 50 do not survive for more than two years and about half do not survive for more than four. In the UK, a research conducted by UHY
Hacker Young Accounting Firm in 2007 shows that 15 percent of all businesses in the hospitality and catering sector fail every year, compared to just 5.2 percent for the economy as a whole.
Hospitality and catering sector accounts for about 40 percent of all businesses sold in Hong
Kong. Therefore, people around the entrepreneurs are often skeptical about the success rate of starting a business in Hong Kong. As a result, consulting others may often make the decision process long and indecisive which may also lead to not buying decision.

In terms of emotional decision making, Mackie and Worth (1989) state that entrepreneurs in positive emotion have the tendency to engage in heuristic based decision making which enables them to make quick decision before the opportunity window closes (Eisenhardt, 1989).
Baron (1998) also finds that entrepreneurs’ greater reliance on certain cognitive techniques, such

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as heuristics and biases, may explain why they are able to detect and exploit opportunities faster.
Slovic et al. (2003) argue that emotion has strong link to heuristic approach of decision making and they concluded such link as “affect heuristic.” As a result, emotion causes one to adopt a heuristic approach in decision making.

With the above said, the following hypotheses are proposed:

H1: Entrepreneurs are less likely to buy a business under rational decision making.
H2: Entrepreneurs are more likely to buy a business under emotional decision making.
H3: Entrepreneurs are less likely to buy a business under dependent decision making.

The GEM (HK) 2007 report states that entrepreneurial activities are negatively correlated to economic development. The more economically developed economies present more opportunities and better prospect which would reduce the desire of entrepreneurs to start up business on their own.

Holtz-Eakn et al. (1994) found that the probability of becoming an entrepreneur rises with the size of the individual’s wealth; entrepreneurs would make a move if they have enough investment budget. Also, according to Messner (1995), up to 48 percent of the 150 executives surveyed would make the move to become entrepreneurs if they have enough capital. Similarly,
Praag and Ophem (1995) find that wealth is one of the necessary requirements for becoming entrepreneurs. As a start, assets or collateral are needed to become entrepreneurs. Lastly, the

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GEM HK 2007 report also found that entrepreneurs are generally wealthier than nonentrepreneurs to start off with.

In terms of previous relevant experience of the potential business bueyrs, Cooper (1985) reports that in a broad cross section of industries, 70 percent of all founders pursued opportunities closely related to their previous employment. Similarly, Bhide (1994) also finds that 71 percent of all founders had replicated or modified an idea encountered through previous employment. Gaddam (2007) also states that economies, personal financial base and work experience are factors that would affect entrepreneurial behavior.

With the above said, the following hypotheses are therefore proposed:

H4: Poor economic environment makes entrepreneurs more likely to buy a business.
H5: High investment budget makes entrepreneurs more likely to buy a business.
H6: More relevant experience makes entrepreneurs more likely to buy a business.

Research Method

A questionnaire survey was conducted through one-to-one telephone calls to maximize the response rate. The respondents are all previous customers of HKBI, the leading business brokerage company in Hong Kong with 65 percent market share in Hong Kong in 2009. A total number of 960 prospective respondents were contacted, of which 410 bought a business and 550 did not purchase any business within the one-year period from his/her first contacting HKBI.
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With a response rate of 29.3 percent and 21.8 percent from those who bought and did not buy respectively, 120 survey questionnaires from each customer group, totaling 240 completed questionnaires were collected.

Rational Decision Making Measurement

This study is more concerned with the individual differences in decision making and less concerned with the demands of the decision task and environment, we therefore adopt the
General Decision Making Style Questionnaire (GDMS) developed by Scott and Bruce (1995).
In the GDMS model, there are twenty five items scored on a five point Likert scale ranging from strongly disagree (1) to strongly agree (5) to measure one’s decision making process. Out of the twenty five items, five items relating to rational decision making were adopted in the questionnaires. Sample items include: “When making a business buying decision, I considered various options in terms of a specified goal” and “I double-checked my information sources to be sure I have the right facts before making the business decision.”

Emotional Decision Making Measurement
According to the Emotion Based Decision Making Scale (EBDMS) developed by
Barchard (2001), there are five items scored on a five point Likert scale that measure one’s emotional decision making process. These items were adopted in the questionnaires. Sample items include: “I listen to my heart rather than my brain for the business buying decision” and “I listened to my feeling when making important decisions, including the business buying decision.” 7

Political (Dependent) Decision Making Measurement

From the General Decision Making Style Questionnaire (GDMS) developed by Scott and
Bruce (1995), five out of twenty five items relating to dependent decision making were modified and used to measure business buying decision. Sample items include: “I used the advice of other people in making the business buying decision” and “I had someone steer me in the right direction when I made the business buying decision.”

Economic Environment Measurement

In order to capture the effect of economic environment, we ask the respondents whether they would decide to purchase or consider to purchase a business if the economic environment was positive in the coming two years.

Investment Budget Measurement

For investment budget, it is measured by the budget available for business purchase.
There are six check boxes available for selection ranging from budget of below HK$100,000 to above HK$3,000,000.

Relevant Experience Measurement

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To find out the respondents’ previous experience, they were asked to rate the following statement “My previous experience is relevant to the business I have purchased or the business that I have considered to purchase in terms of management, sales, marketing or business development.” Overall Results

Cronbach’s Alpha and factor analysis were used to validate the reliability and consistency of the questions. Logistic regression was also used to analyze the data.. For the three contextual factors (hypothesis four to six), only hypothesis five is supported, i.e. the high investment budget makes entrepreneurs more likely to buy a business. Relevant experience and economic environment did not have any significant correlation with business buying decision.

Result of the Relationship Between Decision Making Process and Decision Outcome

Our results reveal that different decision making processes do affect the decision outcome of buying or not buying a business. Entrepreneurs are more likely to buy a business under emotional decision. This is consistent with the argument that timing is of essence and that the window of entrepreneurial opportunities may often be limited (Eisenhardt, 1989). The faster the entrepreneurs make decisions, the more likely they will buy a business. As urban entrepreneurs thinks and reacts very fast, the heuristic decision which appeals to emotion would lead to the decision outcome of buying.
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Many of the risks associated with entrepreneurship are hard to quantify, rational decision making addresses the question of how much is the future worth while emotional decision making addresses the question of whether one should go for the future. Emotional buyers often have more energy to move forward to the next stage of owning their businesses, while rational decision maker may sit around and think about the risks of the future. Very often, rational decision makers only need to find “one” reason to convince themselves not to go, then they stop.
On the other hand, emotional decision makers only need “one” reason to go, then they go. Those differences in the decision making process make emotional buyers more likely to buy a business than rational buyers.

Also, the leading question in Chinese people’s mind for buying a business is often “If the business is so good, why is it for sale?” Due to this common believe, the advisors are usually more keen on being the “detective” for any business traps with most of their effort spent on trying to dig out the potential flaws in the business purchase, rather than spending their energy on discovering the potentials of the business. Such behavior makes it more difficult for entrepreneurs to purchase the business after seeking outside advice.

Experience in business brokerage industry shows that no matter how ready the customer is on signing the sale and purchase agreement of buying the business, if he/she needs to consult with their family or friends, the likelihood of completing the deal is significantly reduced.
Dependent decision making requires more time and time introduces uncertainties into the transaction. As a result, the likelihood of buying a business is lowered.

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Result of the Relationship Between the Contextual Factors and Decision Outcome

Results also show that investment budget is another factor that is positively related to the likelihood of one buying a business. On the other hand, no direct effect is found between the two other contextual factors (economic environment and relevant experience) and the decision outcome. The positive relationship between investment budget and one’s likelihood of buying a business is consistent with Holtz-Eakin et al. (1994) which find that the probability of becoming an entrepreneur rises with the size of the wealth in terms of amount of inheritance and liquid assets. Wealth can remove many of the liquid capital constraint of entrepreneurship. Therefore the wealthier the customers, the more choices they have to choose from and they are more willing to take risk and to buy (Hurst and Lusardi, 2004). With a larger budget, they tend to think about how to develop the business further and are more focused on the prospect of the business, and less on the weaknesses. Such thinking mode accelerates their decision making process. In terms of economic environment, no direct effect is found between economic environment and the decision to buy or not to buy a business. There are buyers of businesses in both good and poor economic times. However, the type of buyers may be different. During good times, there are more opportunistic buyers who are pull-driven looking for investment opportunities or a change of lifestyle to pursue their dreams. However, during bad times, there

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are more necessity-driven buyers searching to buy a business as a job substitute after layoffs.
The net effect on number of buyers becomes close-to-neutral as the two different groups of buyers net out each other. As a result, economic environment has no direct effect on the decision outcome of whether or not to buy a business.

The direct effect of relevant experience on decision outcome is also found to be insignificant. To understand such result, there are two types of entrepreneurs: (1) entrepreneurs with little or no relevant industry experience, (2) entrepreneurs with a lot of relevant experience.
Buying a business is a major financial and personal commitment (Taulli, 2002). Many buyers with little experience are often scared off by those major commitments as they have relatively little confidence in themselves running the business successfully. For those entrepreneurs with a lot of relevant industry experience, they tend to have more confidence in taking up those commitments. Therefore, their likelihood of buying a business seems to be higher.

However, many entrepreneurs choose to buy a business because they do not have the experience to start from scratch (West, 1997). Industry norm shows that such relevant experience reduces the need of one buying a business. He/she may prefer to start from scratch to maximize flexibility and utilize his/her industry experience. In other words, relevant experience enhances one’s confidence in buying business but reduce the need of making such purchase.
As a result, the two forces even out each other causing an insignificant direct relationship between relevant working experience and business buying outcome.

Implications of the Research
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Result of this study shows that entrepreneurial decision making process affect decision making outcome of buying a business. Investment budget is the only contextual factor affect directly and positively the buying decision outcome. Implications from the practical and academic perspectives are discussed as below.

Practical Implication of the Decision Making Process

Results show that entrepreneurs adopting rational and dependent decision making are less likely to buy a business. On the other hand, entrepreneurs adopting emotional decision making are more likely to buy a business. Such result gives a significant implication to the business sellers and intermediaries.

During the discussion and negotiation process, the business sellers and intermediaries should emphasize more on the emotional aspect of the business, rather than the financial aspect which may stimulate rational or dependent decision making. They should focus the discussion more on the emotional stories of setting up the business from scratch, the emotional stories with the employees and the customers, and the emotional stories of fighting against the competitors and other threats. They should also steer the conversation towards the positive emotions brought about by the business, for example, owner’s satisfaction, better social status, or personal dreamscome-true. By putting more emphasis on the emotional discussion, the buyers may become more emotional which enhance the chance of successful business sales.

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It is believed that business buyers are often very argumentative toward financial figures or business performance with the business sellers. However, when the discussion comes to more personal stories with the business or other intangible feeling about the business, the buyers generally become “softer” and are more agreeable with the business sellers. Therefore the business sellers should be trained to appeal to buyers’ emotion instead of engaging in defensive or rational argument with them.

Practical Implication of the Contextual Factors

Based on the results above, it is found that out of the three contextual factors, only investment budget has a significant direct effect on the decision making outcome of buying or not buying a business. There are three implications to such results.

First, in terms of economic environment, business sellers and intermediaries should be aware that there are always buyers in the good and bad economic times. They should be persistent in both economic times to find the matching entrepreneur to buy the business.
Unfavorable economic environment should no longer be an excuse for not getting deals completed. Second, in terms of relevant experience, business sellers and intermediaries should be aware that their businesses for sale may be suitable for entrepreneurs regardless of their working experience history. They should not limit their search of buyers based purely on experience.

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They should broaden their search of buyers from different industries and channels in order to enhance the chance of finding the matching buyers.

Third, in terms of investment budget, a higher investment budget is found to be positively related to an enhanced chance of one buying a business. Therefore, business sellers and intermediaries should dedicate more of their effort to those affluent entrepreneurs with larger investment budgets. They may consider channels that can provide the opportunities to reach the more wealthy entrepreneurs such as through the network of private bankers or financial advisors, media exposure in elite business magazines, or partnership with ancillary professionals such as lawyers, CPAs and management consultants. With the better targeted network, the chance of closing transactions can be enhanced.

Academic Implication

There is a severe lack of research on what factors affect the individual’s business buying decision. This research looks at the three contextual factors (investment budget, economic environment and relevant experience) to determine their direct effect on the decision outcome of buying or not buying a business. The result of this study confirms the argument that individuals with larger investment budgets are indeed more likely to become entrepreneurs. Such statement holds true regardless of the business is started from scratch or the business is purchased. On the other hand, GEM HK 2007 report states that entrepreneurial activities are higher in poor economies and Gaddam’s (2007) argument that economies and relevant work experience affect entrepreneurial behavior are both not supported by the result of this study. A business can be

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started from scratch or by taking over an existing business (Steingold, 2005). The study shows that instead of a general statement that “more relevant experience or poor economies leads to higher entrepreneurial activities,” one should distinguish the relationship between different contextual factors and different entrepreneurial activities, that is starting from scratch or buying an existing business. In the case of buying a business, economic environment and relevant work experience should not be the sole direct factors affecting the decision making outcome.

This research also looks at three different decision making processes (rational, emotional and dependent) and their impact on decision outcome of buying a business. Such understanding can fill the research gap between decision making process and decision outcome.

Lastly, the theoretical framework developed in this study serves as a reference for future study on entrepreneurial decision making under different scenarios. This study should alleviate the severe lack of research on buying a business as an option for individuals to start up a business.

Looking Ahead

There are a number of suggested topics for future research to advance the knowledge of the study in entrepreneurial decision making.

First, the 240 questionnaires collected for this research are all from previous HKBI customers. As discussed in the limitations above, certain bias may inevitably occur during the data collection process due to their differences in satisfaction and impression of HKBI. Further
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research could be conducted based on entrepreneurs from wider range of respondents. They could come from other industry players, direct channels of business-for-sale advertisements, or data from ancillary professionals, including accountants and lawyers. Such research should provide a more comprehensive view of how entrepreneurs from different sources individually behave in their decision making process without influence of one single party, like HKBI. As a result, the research finding may become more representative of the general public.

Secondly, this study has only examined the effect of different decision making processes on the decision outcome of buying or not buying a business. It has not examined the relationship between different decision making processes and the business performance. Which decision making process leads to higher rate of business success after the business purchase? How do we define success? Do people feel regretful more often if they have adopted emotional decision making approach of buying a business? Many questions remain unanswered. Further study in this area will certainly provide better reference to entrepreneurs as to what they should be aware of when they are engaged in any one of the three decision making processes. Such understanding is likely to enhance the success rate of buying a business.

Last but not least, this study has surveyed 120 individuals who purchased a business and
120 individuals who did not purchase a business. However, comparison has not been made between the two groups in terms of: Are they better off buying or not buying? Have they made the right decisions? Have their expectations under rational, emotional or dependent decision making processes been met, or were they significantly different? A further study to compare and contrast those constructs of the two groups shall reveal interesting information that will provide

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guidance to those considering entrepreneurship as to whether or not they should be more aggressive or conservative when starting or buying a business. Such understanding will likely enhance the success rate of entrepreneurship by allowing the potential entrepreneurs to gain a deeper understanding of themselves as well as other entrepreneurs in the market.

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Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.