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- How buying a business can go VERY wrong
Greetings GirdleyWorld!
There are a zillion businesses for sale at any given time.
But if you’re buying, do yourself a favor: be incredibly picky. Years of your life and thousands (or millions) of dollars are on the line.
Scared yet? Good. Here are…
11 traps to avoid when buying a business
Let’s dive in!
(By the way: I’m hiring at my fireworks company! If you know a great Development Manager in Dallas-Fort Worth, send them this job!)
So you wanna buy a business?
Bad news first: it can go VERY wrong.
And if it does, it can put you in the poor house.
Good news: I can help you.
I’ve built and bought a bunch of businesses. Plus my podcast Acquisitions Anonymous looks at business listings every week. In the last few years, I’ve looked at literally thousands of businesses for sale.
Running a healthy business is essential to my well-being. Maybe you feel that way, too. So, I hate seeing people buy themselves a problem they can’t get out of.
Here are 11 traps to watch out for when buying a business.
I’ve seen people fall for all of them. And it’s not pretty.
1. Buying yourself a job
We looked at an event planning business once.
Good revenue, great customers. But the owner/CEO managed 100% of the relationships.
He had to, or else his employees would leave and take his customers.
Any owner will always be trapped working in this business.
2. Ask: Why am I the lucky buyer?
You’ve heard it before: if something’s too good to be true, it probably is.
We looked at a franchise for sale for CHEAP. It seemed like an amazing deal, but…
All the other franchisees had passed on it.
It turned out to be a crap concept.
You can turn this on its head and ask, “Why did everyone else pass?”
3. COVID blips
A business’s value is set by its future cashflows and profits.
You predict those based on past performance.
However, COVID created once-in-a-lifetime situations and government stimulus.
Sure, that mask manufacturer might have had a great couple of years…
You’d be amazed how many of these blips are still throwing off balance sheets to this day.
4. Seller fishing expeditions
We looked at a marina for sale not long ago.
It was an intriguing offer (lots of moats). And at first, it looked great.
But then we dug into the seller profile.
They were a type that would only sell at a “Crazy High Offer or Nothing”.
People like this will waste your time.
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5. Exploding real estate
We looked at a great coffee shop recently.
And of course, retail is all about location. So we checked the lease:
In a growing area (yay!)
Under market rent (yay!)
Lease runs out in 18 months (uh-oh…)
Guess what happens to the rent (and profits) in 18 months?
6. Unfinanceable businesses
Sometimes the problem isn’t the business, but with the funding.
I looked at a B2B services business earlier this year.
They have 3 big problems with financing:
Too big for SBA loans (usual max is $5mm)
Bad 1st half this year due to Ukraine war
No hard assets
Lenders said, “We can’t underwrite this now.”
7. Peaked
We looked at a fleet of Bitcoin ATMs.
These things have been printing money for the last while.
But drug dealers use them, so regulatory scrutiny is heating up.
When the government comes for these…
At best, it will be the biggest headache of all time. At worst, it’s game over.
But the seller wants you to pay like that’s not coming.
8. Buyer-business fit
Bill D’Alessandro and I looked at a ski rental shop for sale in rural Colorado.
Solid business, with room to grow at a reasonable price.
But you have to move to rural Colorado.
That can get lonely.
A business must be suitable for the life you want.
9. Not owning your customers
We looked at an FBA Amazon business that was priced right.
But any Amazon business has a problem:
You don’t own the customer relationships.
Amazon chooses what products to show them, so you live or die by the algorithm.
Significant risk is an understatement.
10. High degree of difficulty
Some businesses are just plain hard.
We looked at a casino in Costa Rica. It could be great.
But not if you don’t speak Spanish or know all the rules.
Others (like contracting) are HARD because of cash flow. There are easier ways to get rich.
11. High working capital requirements
Picture this:
You buy a business for $1mm.
Only to discover it needs $5mm in inventory to operate.
Suddenly this “cheap” business needs more cash than the purchase price.
If your pockets aren’t deep enough, this can be big trouble.
Want more like this?
It’s good to practice before you buy. If you want to get some virtual reps in, check out the Acquisitions Anonymous podcast.
We do short episodes (about 30m) twice a week, breaking down a new business every time.
(Spoiler alert: most of the time we don’t like the deal!)
—
3 things from this week
Appetizer: Made a fun video on the crazy money in March Madness jets.
Main: Dave Kline’s newsletter is probably the best resource for managers out there. From his 1-minute read this week (read it here!):
Dessert: Sometimes it’s the little details that get you.
—
That’s all for this week!
Thanks for reading.
Michael
P.S. Interested in funding an SMB acquisition? Mark May 8th in your calendar. Come and learn the ins and outs of SBA funding and finding the best lender for your purchase.
World-class financing expert Heather Endresen is joining me for a masterclass lecture. Plus, we’ll be taking your questions! RSVP today.
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