by Bob E. Pace
The internet has changed many things in this wonderful world of ours. Buying a business has changed greatly. In fact, so much has changed that even the typical person has changed. In times past, many small business owners had little-to-no college education, and were very active and proactive type of people. Many knew, even before beginning to search for a business, how “the world” worked. Much of that has changed.
Today’s typical business buyers are better educated, have worked in a large corporation, but are more passive. They know theory but do not have a lot of “street” experience. They understand management from an HR standpoint, but not in the much more intimate and personal setting of a family business with just a couple of employees. They know more going in how to search for target business, but don’t know as much about running a small business. They know more about financial statements, but don’t know how to read between the lines to really know which business is the truly good opportunity.
It’s very understandable, actually. Our college education and subsequent work experience in professional mid-to-large companies has trained us to look at audited financials. We were taught not to trust anything that can’t be verified…meaning an unbiased third party. However, usually in a smaller “Mom & Pop shop”, there are no audited versions of anything. Many times even the tax returns are rather messy and somewhat inaccurate due to write-offs, paper losses, and things of this nature. Or possibly because there were a “few” cash transactions that might not have even made it to the books.
Many prospective buyers are just not accustomed to looking through and reading scraps of paper to build the REAL story of a business they are interested in purchasing. They need to be reminded to go and perform real due diligence – to just sit and watch the business for a certain length of time, in order to get the real story. Watch how much business comes in on a daily or weekly basis. Watch the employees while they work. Look for opportunities where you can make a difference in how the business is run.
Another item to ponder as you look for a business is whether or not you will have employees. Due to the Internet it is possible to run an entire company without a single employee. It never ceases to amaze me at how many very profitable small businesses there are without any employees other than the owner. Usually they are in niche markets where the customers have a passion (such as a hobby, sport, or activity).
If there are employees, will you be able to manage them? Managing employees in a small company is very different than in a large multinational corporation. Generally, the smaller the number of employees, the more personal it becomes. Many a new owner is surprised that one of the hardest companies to manage can be a single employee company. Since there is little-to-no separation between boss and employee, it follows that there is ‘no place to hide’. Therefore owners with one employee have to be much more earnest and even keeled.
This brings up a complementary point both regarding internet and brick-and-mortar companies. The prospective owner needs to consider the time investment a business will require of him or her. First and foremost, but not the only time management question is how much time per day will it take? Is the time commitment the same day-to-day? Or is it a certain number of hours per week that you will have to perform but not worry really about any specific hours? Some people really need to have a daily routine. Some don’t want a daily routine because they are escaping a life that was required in their previous job. Also, is it an early morning commitment (as in a bakery or doughnuts)? Or late night hours like a bar/nightclub? Remember that even many restaurant owners work well past closing to get things ready for the next day. Every type of business has a tempo that an owner must follow to be in tune.
As an experienced business broker, it seems to me that too many people searching for a business to buy are looking for a specific kind of business instead of looking inside themselves for what their personalities and physical strengths/limitations may be. Many new owners are shocked to find that, for instance, owning a bar keeps them up later than they thought. Or that their personalities are better suited for not being in direct contact with customers. Before you get started, know thyself. Know your strengths/weaknesses and likes/dislikes. Then look at the types of businesses that play to your strengths and likes. It will make having your own business much more fun…and probably much more profitable!
Bob Pace is has been a California Real Estate Broker since 1997 breaking into the industry by creating a company that rehabbed tired properties just prior to sale. He holds a BS in Industrial and Systems Engineering from the University of Southern California with an additional 30+ credit hours in Chemistry. He has been a Business Broker for 5 years and sold almost every kind of business there is in Orange County.
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