I received word this morning that for the second time in as many weeks, a small business that I was looking at acquiring has agreed to a deal with another buyer.
When I lose a deal like this, I am never entirely sure why that’s the case.
You don’t know when others began their conversations. It could be that they were already pretty far down the road before I even got involved.
Or it could be that they are just moving more quickly than me.
I’ve never been one to jump into things like this very fast. I tend to analyze, think about options, and really take my time. I decided long ago that I would rather lose out on a deal rather than rush into something.
So while my missing out on these last two deals could just be a coincidence, I am starting to wonder if maybe something else is going on.
Limited Investment Options
For a while now, there has been concern that the stock market is over-valued. The US economy has been in a very long sustained period of growth. As such, assets are expensive – whether it’s stocks or real estate.
I continually see bloggers, economists, and others talking about hoarding cash. They talk about holding off getting in the market right now.
This is especially the case with the upcoming presidential election looming. Big political events such as this can have a big impact on the market – remember Brexit?
At the same time, the Fed continues looking for an opportunity to begin raising interest rates. And across the board, rates have been increasing.
This makes investing in bonds more risky. As interest rates rise, the price of a bond drops.
So for those of us with excess cash available, what should we do with it?
Small Business as an Asset Class
I decided a while back that I wanted to deploy a portion of my excess cash into a closely held business. I’ve been looking for opportunities to start a business and possibly buy a complementary company to jump-start things.
If I can find a business with an established customer base, existing employees, and a business model that makes money, I can more quickly focus on growing the business rather than spending my initial time finding a product to fit the market.
And as I go about this process and look for a small business to buy, and then find that they’ve already agreed to sell to someone else, I’m wondering if others may have the same idea.
While the stock market may be over-valued, it’s not necessarily being reflected in the performance of smaller businesses.
The economy has grown steadily, but not very quickly. As such, many companies have shown reasonable growth but nothing fantastic. And small companies tend to sell more on a multiple of real cash flow than on artificially inflated P/E multiples like you see in the stock market.
While There Are Jobs, They May Not Be Desirable Positions
The other factor driving greater investment into small business is the job market.
Similar to the overall economy, the job market has seen steady increases for a long time now. But that doesn’t necessarily reflect the quality of the jobs available in the market.
One of the groups that I am a member of focuses on finding employment for senior level finance and accounting people. I make it a point to regularly reach out to new members to introduce myself and offer my help. In fact, there are quite a few readers of this site who met me through just such an introduction.
Many of these people have recently lost their jobs. It’s the reason they joined the group. And it’s not uncommon for me to hear back from these people about how difficult it has been for them to find another comparable position.
It doesn’t seem to be regionally focused or industry specific. There is just an overall shortage of higher-level corporate positions.
Buy a Job and Invest Your Money
So my theory is that investors are looking for places to deploy their excess cash and they’re putting that money into a small business as that looks like the most attractive option available.
And at the same time, because they are having trouble finding another job that pays what they were earning in a prior role, it makes sense to investment in yourself instead.
These folks are making the best of their situation and we’re seeing more investment into private companies as a result.
I think this is a good thing as small business is what employs most people in this country. Small business is always where we see the greatest level of innovation.
The more money we see flowing into small, privately held businesses, the better for the economy not just now, but years down the road as well.
Readers, do you know any small business owners? Have they seen an increase in interest to buy their business recently? Do you think investing a portion of your net worth into a small business makes sense?
Since the first post I read about this plan of yours, I have been intrigued by your venture. Thx for sharing with us.
The idea crossed my mind a few times to start something myself. Just like you, finding a first idea seems to be very difficult! I have not yet made the reflex to go and buy a business. I guess I am too risk averse to see a venture like that happening in my current life/asset base. TO me, there is not only the increased risk, also the increased responsibility and tasks that come from fully owning and running a business. Till now, I have only been responsible for running operations and teams within structures that take care of everything else.
I do belief that entrepreneurship is one way to become free and make a lot of money.
Exciting times for you!View Comment
Financial Slacker says
My biggest problem hasn’t been finding an idea, it’s been picking one. I have three or four that I keep bouncing around. And after a friend suggested another one the other day, I guess now I have five.
And it is very different buying a business for yourself than buying one for someone else. I’m still trying to get my arms around it.
Thanks for sharing.View Comment
I would love to buy a small business but I haven’t seen anything that has jumped out at me that aligns my passions with the business areas. I think as more baby boomers retire that we should see an influx of businesses in the next 5-7 years but I could be wrong. In the meantime, my extra cash is sitting waiting to be deployed if the market drops by 10% or more. However, if a small business pops up I will definitely jump in.
I really enjoyed reading the post. Thanks for sharing!!!View Comment
Financial Slacker says
I’ve tried to move away from looking for a business that aligns with my passion. I’ve never been quite sure what I’m passionate about.
Instead, I’m looking at what interests me and where can I see a path for growth. If I can meet both of those criteria, as well as finding a deal that makes financial sense, I’ll pull the trigger.
Thanks for stopping by and sharing your thoughts.View Comment
Dennis @ NestEggRx says
The Millionaire next door showed that the two largest paths to wealth are business and real estate. What concerned me about business is the stats. 80% fail with in the first five years and 96% fail by 10 years. Those are not good odds. None of the real estate asset classes have foreclosure rates that high, and some of them have very low foreclosure rates. If you are determined to start your own business, why not increase your odds and start a private real estate acquisitions and asset management firm?View Comment
Financial Slacker says
Thanks for stopping by and commenting, Dennis.
You bring up a really good point. Small business failure rates are extremely high. I have considered real estate and actually started putting funds into the sector a while ago.
It’s probably worth looking into more closely.
Thanks again. Great comment.View Comment