I am wavering in my decision to buy a business.
Maybe it’s the realization that owning a “main street” business will require major life changes or maybe it’s the concern over spending the money to buy a business in an industry that I don’t know well. Or maybe it’s that I haven’t yet found anything that I feel comfortable buying.
Whatever the reason, I am not encouraged by what I’ve seen so far.
The good thing is that I haven’t spent much money. The bad thing is that I have spent considerable time and effort.
The Last 12 Months
When I started going down this path a few months ago, I thought buying an existing business would be a great way to accelerate growth in a new startup business. I had been away from a traditional corporate job for a year or so, and while I was consulting and keeping myself busy in other ways, I was starting to miss some of the excitement in running a traditional company.
Previously, most of my time was spent managing and growing someone else’s business. I didn’t dedicate as much time, energy, and effort to managing my own personal finances. In my own terms, I was a Financial Slacker.
Since leaving the corporate world, that has all changed. My focus and most of my time is now spent on activities that directly benefit me and my family rather than someone else.
On the personal finance front, I used Personal Capital to take control of our expenses. We made cuts in some areas and have rededicated ourselves to saving as much cash as possible.
On the investing front, we fired our financial advisor and started managing our own portfolio. Not only did this save fees both by eliminating the advisory fee, but also by moving our portfolio out of high-cost mutual funds into lower-cost ETFs. This alone is saving us thousands of dollars a year. And by taking control, we also felt comfortable investing in alternative assets with an ownership interest in a real estate investment fund.
And on the professional front, I started freelance consulting, created this website as well as a few others, and overall I’ve been channeling my energy into new self-employment ventures.
Why I Want to Buy a Business
But this past year has also brought about a number of big lifestyle changes.
My professional life especially has changed. I do not have an office outside the home. I no longer have employees, work peers, or a boss. And rather than spending the majority of my time travelling for business, in meetings, and on conferences calls, I mostly work online.
When you work independently online, it can feel isolated. Coming from an environment of constant collaboration on everything, when you no longer have that team, it can be difficult to keep your priorities.
I find it easy to get distracted. There’s always more than can be done. Whether it’s working on another article, or tweaking the site, or responding to emails, it’s important to keep focused on what will improve the business. But the challenge is that you don’t always know what’s the best use of your time.
In my prior life, my work priorities were usually pretty clear. As an employee, you know what you’re responsible for and you can focus your energy in that area.
As a business owner, you’re responsible for everything. And since you cannot focus on everything at the same time, you’re forced to pick and choose how you decide to allocate your time each day.
And while buying a business wouldn’t change this, running an existing “main street” business feels more familiar to me than running an early-stage online business.
Buying a business is my way of recreating my past and trying to find comfort in what I know.
My Recent Business Buying Experience
So far, I haven’t been impressed with the businesses I’ve come across.
When I look at these businesses for sale, they seem antiquated. I’m not sure I would say that their way of doing business is a thing of the past, but none of them are growing. Sales fluctuate up 20% one year and are down 20% the next.
This may be somewhat driven by the lack of population growth here. These are small businesses serving local customers. And if the population isn’t growing, you’re dependent on taking business away from somewhere else to grow.
I’ve worked in declining industries before. It’s difficult. Growth is expensive and retaining employees is challenging.
And it concerns me when I see these trends.
Risks When Buying a Business
There are three primary risk areas in buying a small business:
Cash Flow. When you buy a business, you’ll usually pay anywhere from 2x to 5x times cash flow. As a corporate buyer, generally, I would pay on the higher end between 4x and 5x free cash flow. As an individual buyer, I would expect to pay between 2x and 3x free cash flow. Depending on how much debt you use to finance the purchase, most of the cash flow from the business will be used to service and repay that debt. That leaves very little cash flow available for you the owner. At least not much cash flow until the debt is repaid or the business grows.
Time commitment. Running a business requires a significant time commitment. You’ll spend your time pursuing new sales, handling your existing customers, and managing employees. And while all that’s happening, you’ll also need to plan for the future. How will you remain competitive? New products and services? Additional sales channels? All these activities require time and energy.
Operational Risks. Lastly, there are the operational risks of running a business. Unless you’re buying a business exactly like the one you’ve worked in before, there are operational risks. And even in a business that you know well, things can go wrong. Technology innovations, new competitors, changes in client expectations can all impact your business and require major adjustments.
While I haven’t given up on the idea of buying a business, the process so far has been a little humbling. It’s slow going and I suspect that I’ll need to look at many more businesses before I find one that checks all the boxes. Until then, I’ll keep persevering.
Readers, I would love to hear about situations you’ve been in that required perseverance. When things are slow going, how do you stay motivated?
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I think finding the right business takes time. This may be a bad analogy but it took me a long time to get married. But when I met my wife I knew instantly she was the one. Hopefully by being patient you will find the right business for you. I’d hate to hear that you jumped into something only to regret it later.
Thanks, MSM.
I can think of nothing worse than sinking your money into a business only to regret it later. Good advice.
I’d take your time and keep searching for the business that you’d feel comfortable with because, like you said, it’ll be a life changing event. I know that was certainly the case for me when my siblings and I bought a business earlier in the year. And we couldn’t do it without each other’s help.
Also, we had been searching for years! We find a number of opportunities we’ve pursued but ultimately didn’t work out for one reason or another. But being picky pays off. The one we finally bought has turned out to be a good fit for everyone and we’ve been able to learn the business quickly and improve operations. Quite a process for sure! Keep persevering and you’ll find the right one for you.
Thanks, Green Swan.
It’s great to hear that it did work out for you and your siblings. I’ll be patient and until then I have plenty to keep me busy.
Really enjoyed this post, as it speaks to where I am at today. I am interested in purchasing a small retail business in my home town as it has potential to be recession proof, has a great value proposition, little competitors (niche but not really niche) and it is not marketed very well (their clientelle are mostly seniors). I am already thinking of ways to improve processes, improve marketing and also some innovation. Slight problem….not sure if the owner is thinking of selling (based on my research most of the owners have been doing it for a long time and are close to retirement), have never owned my own business (only got my side hustle as a landlord), and have no experience in the industry. This doesn’t bother me as I am not intimidated by not knowing and see it as a challenge.
This is just a long-winded way of asking you what your process is and what criteria you use to invest in or own a small business.
Thanks again for writing and sharing this post. It really made me think.
All the best,
Mr. PFC
Thanks for commenting and the compliment, Mr. Prairie FIRE.
In my experience with small business owners, most are welcome to hearing purchase proposals so long as they are legitimate. But while they are open to hearing what you have to say, they are also hesitant to admit they would consider selling if they think word could get out to their employees, customers, vendors, or others.
One approach is to begin building a relationship with the owner. Start using the company on a regular basis. Strike up a conversation with the owner. Ask questions about the business. How did they get started? How long have they been in business? What are some of the challenges they face – getting customers, keeping staff, etc?
This approach may not yield immediate results, but in relatively short time, you should be able to introduce the idea of a sale and get a feel for whether the owner is interested. And even if they’re not interested at the moment, they may be in the near future.
Thanks again for commenting and please let me know how it goes.