One of the biggest problems with small businesses is that often times, the owner does everything.
When these businesses are for sale, it is common to identify them as ones where the assets of the business walk out the door every day when the boss leaves. For a prospective buyer, it can be challenging to come to grips with taking over a business like this and having to suddenly be responsible for every aspect of running it.
It is important to realize that the very nature of a small business can force the owner to handle multiple tasks for several reasons.
Without staff handling some of these jobs, the owner keeps taking on more responsibilities and the result is they do not have any time to grow the business. It is an endless cycle. When these businesses are put on the market for sale, they are the ones where a buyer is really just buying a job, and while that is not necessarily a bad thing, the question one needs to ask is what is the potential upside to the business. If it is limited and the current owner has taken it to a level that cannot be increased, then a buyer must determine whether or not they are okay with taking it over and facing the same daily routine as the seller. Again, for many buyers, this is more than acceptable.
I personally prefer the approach of buying businesses with growth opportunities. It is my experience that if a business cannot be grown, there is only one way for it to go, and any decline brings on a whole new set of issues and concerns.
Having analyzed thousands of businesses over the past twenty five plus years, I have seen too many instances where owners fall into cruise control mode. Whether it is a matter of limited skill, the actual business type, boredom or laziness, as a buyer, it is crucial to investigate the business to see what, if anything can be done to increase the sales and of course the corresponding profits. Keep in mind that except for situations where a startup business had enormous capital at the beginning, every large business started out as a small one.
The key is being able to identify initiatives that can lead to growth.
Next, one must determine what the cost will be to grow the business, and whether the existing revenues can throw off enough cash to fund these plans.
When I purchased my second business and each one thereafter, I did not take out any money from them initially for myself. All of the cash generated was used to service the debt, and I invested the excess into advertising, marketing, product development and staff. For me, the strategy worked brilliantly however, I had the luxury of having another business that paid my bills.
With a single business, the money can be tight, especially at the beginning.
One of the main pitfalls I have seen buyers fall into after buying a business, is paying themselves too much. Don’t get me wrong here, one of the goals of a buyer should be to acquire a business that pays them a lot more than they can make as an employee. However, at the beginning, it is a far better approach to take enough out of the business to live on and not a penny more, and use all additional available cash flow to fund growth. The best initial investment that should be made I believe is in support staff. Hire someone, even if part-time, to alleviate your workload. Let them take over the non-revenue generating tasks to free you up so you can start to work ON the business, and stop working IN the business.