When Buying a Business is a Bad Idea

Escaping the rat race and buying a business

The safest route out of the rat race

Escaping the rat race and buying a business

Business is all about managing risk, it’s not about keeping your fingers crossed

A friend of a friend (let’s call him John) asked me for my advice the other day. John has a job in a marketing department of a big city corporate. John is good at his job, but he can’t see himself ever getting to the top of the ladder and in the mean time he just hates not being in control of his career and his life.

So John wants to become his own boss and he is considering buying a small business on Sydney’s North Shore. The business he is looking at is healthy, it has good established, profitable contracts and solid trading history, happy customers, and John can afford the purchase price of about $500,000 by borrowing against his house.

Disappointing advice

John is keen as mustard, he’s chomping at the bit to become corporate rat race escapee and take control of his own future. If you’ve read some of my previous articles about happiness and being in control of your own life (here for example), you might be surprised to hear that I strongly advised John against buying the business.

John was surprised too. Given I am a business coach, he’d assumed I would have told him to go for it. And let’s be clear about this: I do think it is a great idea for John to get out of the rat race. I do think that John is going to become increasingly frustrated in his current career. I do think John is the kind of guy who will do really well as a small business owner, and I do think the business John is looking at buying is healthy.

Business is about managing risk

But my advice to John was all about managing risk.

Business is about managing risk. Smart business owners are masters of managing their risk; They know you can’t do it risk free, but they look for every opportunity to postpone it, spread it or lower it.

The risks for John in buying the business are immediate and significant. These are some of them:

  • After a few months of being a business owner and after the first gloss has rubbed off, John might realise he actually hates his new life. John hasn’t run a small business before and he may well have an unrealistic notion of what it is like.
  • Currently happy clients may leave as soon as the previous owner leaves (In fact that nearly always happens after a change of ownership).
  • John may find it tough going to renegotiate some of the regular contracts when they come up for renewal.
  • Either or both key employees simply decide to leave, taking all their business knowledge with them, leaving John in a pickle because he isn’t trained in the actual work of the business, himself.

No compelling reason to buy a business

Escaping the rat race and buying a business Most problematic of all though, is that in a business purchase such as this, there is little or no connection between the Purpose of the business and the values, beliefs, and passions of John himself. In effect, John would be getting into this business for no other reason than that it happens to be for sale and that he believes he can make money from it. In my book, that is one of the least compelling reasons to be in any business. Great Small Businesses, businesses that stand the test of time and create sustainable value, have a compelling reason for existing that connects deeply with the personal values and beliefs of the owner.

If you were to ask the owner of such a business: Why does your business exist and why would anybody care? You would get an immediate, succinct and clear answer. John doesn’t have this clarity and without it, I believe the risk that the business is going to flounder is too great for John.

John was deflated when I advised him to steer clear, he was all set to finalise things with the bank and move ahead. He knew it was time for him to become his own boss, and he’d figured that buying an established business was the least risky option.

Investing in himself

So I asked him to run a thought experiment with me: “You told me that you’re prepared to invest $500,000 into buying an existing business. Now imagine that, instead of buying an established business, you’d start your own business and that you go to your bank and borrow half that money, $250,000, against your house and on day 1 of the launch of your business you deposit all of that money into it’s brand new bank account.”

“Now, suddenly you are the owner of a business with significant assets and cashflow is not going to be the first thing you need to worry about. With that money you can employ an assistant and pay a rental bond on an office and you can pay yourself a salary for a year and as you’ll start to generate some income during that year, you’ll have money left over to subsidise your salary into the second year. That would give you two full years at least to get the business to a breakeven point.”

As I said before, John’s a smart guy and I have no doubt that if John started a Marketing agency for example, he could get to breakeven, long before the money ran out.

A lot less risk after the rat race escape

Comparatively, the risks are small. John will know if it’s going to come together for him after 6 months, and if it doesn’t, he can wind the whole thing down and get a job again. If so, he will have lost only a fraction of his money. And if it all goes well, he’ll have more money available to invest in his business over time.

Not every business can be started with little or no investment, if you want to get into the restaurant business for example, you have to pay for fitouts and commercial kitchens and all that stuff, and it may actually be more economic to buy a going concern, but most small business can be started small and slow (Read my article “Slow and Steady Wins the Race in Small Business”).

Taking risks you don’t need to take is called “Managing by Keeping your Fingers Crossed”… Not a technique I suggest you master in your journey to being a Great Small Business Owner. (I spoke to John last week and I am happy to report he hasn’t bought the business and is considering what kind of business he may start up and how to go about it)

#FunInBusiness #BuyingABusiness #ControlOfYourLife #LeavingTheRatRace

 

Btw, If you’d like to know more about what it takes to get a business off the ground, you can download my first book below for FREE.

FREE Download: The Ten Truths for Raising a Healthy Bouncy Business.

How to Raise a Healthy Bouncy Business

 

2 comments on “When Buying a Business is a Bad Idea

  1. so interesting response and I agree an existing business for something in theory could be all done in the cloud and mobile is more of a risk. what about buying a convenience store vs fitting out a new one. if you build a new one in a location that has not got one you need to educate the consumers your there. as well as get permits and requirements so whats your opinion with this. I am considering buying a previusly used investment visa business to convert it to a convenience store reminiscent to what used to be the corner shop and supports local farmers for produce sells coffee roasted by local small batch roasters. provides seasonal produce and local dairy free softserve and drinks.

    but I am on the fence about if it would be better to go from scratch vs repairing the damage from the last owner

    • Hi Arron, thanks for your comments. The question you ask is a difficult one to answer in general… you’re right, in some circumstances it may pay to take over an existing business because the customers are already used to the business. If you’d like to have a chat with me about the question in an effort to unpack the many different factors, please feel free to get in touch with me.
      Cheers
      Roland

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