My consulting business is based on helping fellow entrepreneurs. But as most of you know, it’s not all yachts and mansions. In fact, for many small business owners, it’s more like a life of 10 year old cars, microwave dinners, and struggling to make mortgage payments. So today, I’m going to talk about the top 4 reasons why you should think twice about buying a business.
When you buy a business, you may be overpaying for someone else’s hard work.
In venture capital, they call it an “exit”. A person starts a business from scratch, works hard, gets some lucky breaks, and makes some good decisions.
After a number of years in the business they decide to sell the business. In most cases, they value the business at some multiple of cash flow. So if the business has cash flow of $100,000, they might ask $200,000 for the business. This price isn’t really based on anything except what others have paid for similar businesses with similar cash flow.
Sure, you can finance the purchase with an SBA loan, but in my opinion people seem to not think twice about taking on large amounts of debt, with their first realization that they borrowed too much only after they default on their loan and come to me about submitting an offer in compromise.
I’m not saying that buying a business is always a bad idea, but I do believe that some people are so excited to buy a business that they overpay for the business, forgetting that the cost of repaying the loan is going to put a big dent into cash flow.
Being The Boss Isn’t Always Fun
I know, I know, we have all dreamed of being the head honco, calling the shots, and making the business run like a well-oiled machine. But here’s the thing that real-life small business owners will tell you: it’s not just counting fat stacks of $100 bills.
When you have a job, you can leave work, and not think about it again until you go back to work. When you own the business, the buck stops with you. Bad employees, angry customers, product issues, and even clogged toilets are all under your purview. And as a business owner myself, I can tell you about all the weekends and vacations that required me to drop what I was doing and deal with an emergency.
Businesses Ebb and Flow with the Economy
I tell clients all the time that sometimes a business failure is simply out of your control. Have you ever heard the saying “timing is everything”? Well, it certainly applies to businesses. In 2008, I was hired as an SBA loan underwriter. Less than 2 months after I took that job, the economy collapsed. In the blink of an eye, the businesses who previously had no problems making their loan payments were struggling. Their big mistake? Owning a business during the biggest financial collapse since the great depression.
In other words, it was completely out of their control. The part that stings the most is that in addition to losing the business, many borrowers lose their investment in the business, and if they choose to pursue a settlement of their debt, it’s likely that they be asked to pony up out of their own pocket (i.e. personal guarantee).
You Can Lose Everything, Including Your Home
I’m surprised by the number of people who don’t take the personal guarantee seriously. In some cases, their lender tells them “off the record” that if things go wrong that the bank will “work with them”. In others, they believe that because these loans are government backed, that their loan is part obligation, part charity. They think that if things go bad, the governments guarantee will cover the loan loss.
Even for the people who understand that forgiveness is not automatic, or a right, they don’t realize how serious it can get. I’ve seen homes foreclosed on, wages garnished, and bank accounts cleaned out. It can get nasty, folks. The nice banker who handled your loan is out of the picture, and instead, you get stuck dealing with the banks workout officer and/or their attorney.
While the above may paint the experience of business ownership as doom and gloom, the truth is that I’ll never work for someone else again. Like, ever. With that said, any business I go into will likely be one that I start from scratch. With all that can go wrong when you buy a business, I’d much prefer to be the guy getting paid for what he built than the guy who overpays for it!
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