If you are thinking about buying a business, especially if you are not already a business owner, one of the first questions you need to ask yourself is, “how big of a business should I buy?”.
This answer will be unique to you and depend on a multitude of factors. If you take the advice of Twitter or any of the many armchair advisors, they will suggest purchasing the largest business you can with the resources available to you
We understand the reasoning, but are firmly in the “buy, then build” camp. Here’s why:
Story Time
3 years ago one of our Co-Founders was involved with a seller who purchased a small home services business for $75,000.
The purchaser worked his tail off, expanded the range of services, increased the margins by raising prices, and then developed a unique employee retention system. He reached out to us for advice when he was selling a majority of the business to an operating partner. The valuation of the company this time was $1,500,000.
This is a perfect illustration of the benefits of purchasing a very small business. Low initial investment, no debt beyond a small seller note; but because the business was already operating, he got the benefit of an established product - market fit, a known brand, a small, trained workforce and instant cashflow. So in this case, existing business + motivated purchaser = a 20X return on investment over 3 years.
Obvious:
1. Lower initial investment = less downside financial risk.
2. Retain more equity – the purchase of a smaller business may allow you to retain 100% control rather than diluting with non-operating investors.
3. Smaller personal guarantees (Lower Risk Tolerance) If you have a lower risk tolerance, you may prefer a business with a more manageable scale.
Less Obvious
1. Easier Management: Managing a smaller business can be less complex and more manageable. Fewer employees and simpler organizational structures can make it easier for a new owner to oversee day-to-day activities.
2. Personal Involvement: Some buyers prefer hands-on involvement in their businesses. Smaller businesses often allow owners to have a more direct and personal role in decision-making and operations compared to larger corporations where responsibilities may be more divided. If your plan is to purchase more than one business, developing operating and managerial experience with a small business where you touch all the parts will position you well as you grow the business and/or look for other acquisition opportunities.
3. Niche Market Focus: Niches make riches, depending on your goals, there may be less competition in a niche space albeit with less upside, but in the SMB world, you need to be comfortable with trade-offs.
Not obvious at all
1. Lifestyle Considerations - Smaller businesses may better align with your lifestyle goals. They may offer a better work-life balance, allowing you, as an owner, to have more control over their schedules and personal lives.
2. Specialized Expertise - Buyers with specialized industry knowledge or expertise may prefer smaller businesses within their domain. This allows them to leverage their specific skills and experience to enhance the performance of the business.
3. Local Community Impact – If you are interested in bolstering your local community, purchasing a local small business will give you the opportunity to contribute to the local economy and you will have the opportunity to become an integral part of a local community.
Wrap up
In conclusion, the decision of whether to buy a big or small business is a pivotal one that hinges on various factors, and there is no one-size-fits-all answer. The story of a buyer who turned a small investment into a significant return is a compelling testament to the advantages of purchasing a smaller business and building it up over time.
The obvious benefits, such as a lower initial investment leading to reduced financial risk and the ability to retain more equity and control, are critical considerations for those entering the entrepreneurial arena. However, beyond these advantages lie additional, less obvious factors like ease of management, community impact and alignment of lifestyle goals that can make business ownership a joy, rather than a burden.
The decision between big and small ultimately boils down to individual goals, risk tolerance, and personal preferences. Whether you opt for a large-scale enterprise or choose the path of starting small and building your way up, the key lies in aligning your choice with your unique vision for success and fulfillment as a business owner.
