MANAGING THE RISKS OF OWNERSHIP

MANAGING THE RISKS OF OWNERSHIP

Owning and operating a small business may seem risky.   You head may be filled with all the things that could go wrong such as:

  • What if revenues drop once you take over running the company?
  • What if your most valued customers switch to a competitor?
  • What if the market for the hot new technology you’ve invested in crashes?
  • What if you can’t pay the employees who depend on you?
  • What if……….?
  • What if……….?
  • What if……….?

The list is probably longer and scarer the more you think about it. Sure these things could happen, and remember that they could happen to a larger more established company as well.

The key take away is that you can mitigate the risk during the buying process and this book will show you how to find businesses that  are sustainably profitable, companies that have a high probability to providing stable income over time. There are obviously no guarantees, but from experience I have found that the best target companies have:

  • Established in the market
  • Slow steady growth rates
  • Recurring customer base
  • Non-tech
  • Stable industries
  • Stay away from businesses that “simply” need a turnaround.

It’s not always easy to know what makes a small business enduringly profitable, but we have identified a few indicators to use as you evaluate potential businesses: for example, the business should be an established one that is growing slowly and has recurring customers. We recommend against buying a tech company or any business in a volatile industry, and we urge you to stay away from companies that “just” need a turnaround. I always advise that “dull” businesses are often fantastic business opportunities and typically offer lower risk compared to the flashy small business.

IT IS IMPORTANT TO APPRECIATE THAT MANY ALTERNATIVES TO BUSINESS OWNERSHIP MAY ACTUALLY BE RISKER THAN YOU THINK. CONSIDER YOUR OPTIONS:

1.  STARTING A BUSINESS: 

Think about starting a business from the ground up and consider what the risks would be:

  • Will the product/service support a sustainable and profitable business?
  • What are the costs in product/service development?
  • Who are my potential customers and how do I reach them?
  • How would I deliver the product/service to the customers?
  • Who can I hire to help with my business?
  • How do I market to my customers?
  • What price are customers willing to pay?
  • Etc….

Acquiring an existing successful business, will provide you the answers to many of the above questions.  The original owner did most of the heavy hitting already and have made the mistakes and learnt from them to get the business to the point it is today.   Typically, buying an existing, sustainably profitable business is less risky, but not without risk.  Why are existing businesses safer?  Simply put, existing businesses are safer because the fundamental questions about the viability of the basic business model has been proven. When purchasing an existing business, the product or service is already established, and if you buy the type of business recommended, it will most likely produce steady cashflow and will allow you the time to focus your attention on operational improvements and revenue growth.

2.  WORKING FOR A LARGE FIRM

A significant portion of entrepreneurs quit a good job at a large organization to pursue a business ownership opportunity.  Working for a large entity like PepsiCo, Microsoft or General Motors you know that the company as a whole is not going to vanish the way that a small business might, but the division you work for might shut down, your position might be eliminated, or your career could be negatively effected by company politics common in larger organizations.   You might find that as you grow within the organization that your role shifts in a direction that you enjoy less or one which limits your growth options.  Often, these risks may not  become evident until it’s too late, and as an employee, you will most likely will have very little control over the situation.

Don’t be misled, the path of business ownership through acquisition is not an easy one.  My father used to tell me that “success comes before work only in the dictionary”, and business ownership is no exception.  Success comes from hard work, reliance in face of adversity, common sense (which may not be that common anymore) and a strong business acumen.  Entrepreneurs will tell you that given all the risks and challenges of business ownership, the benefits outweigh the negatives.