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Buying your first business


CONeal
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My understanding is some of you on here are actual business owners.  Would like to post a question to gain some insight to know where I need to focus my attenion since this is different then just owning stocks.

 

Would like to own my own business in a few years.  Focusing on businesses that are already in operation.  If its an idustry that I have no experience in, then would use a few years to gain the experience.

 

Do you have any suggestions on what path to go down, books to read, or things I need to consider?  While there are articles on the internet most of it seem like they were written by someone that has never done it before or doesn't really provide any meat.

 

Not really 100% sure on where I would like to focus my energy but would like to stay out of the food, retail, internet industries.  Been thinking about manfacturing precision tools.

 

Most of my experiece has been with database marketing in the financial and healthcare sectors.    Have experience operating a farm in runoff but it is not something that would be repeatable.

 

Would deeply value any insight you could provide. 

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Hey CONeal-

 

I am not sure what your current situation is, but you may want to consider trying to find a job in the field

or type of business you are interested in purchasing.  One advantage of this is that you will be getting paid to train and

"learn the ropes" and will be far more knowledgeable if you decide to own that type of business.  You may

learn the types of things you can emulate to succeed or certain techniques that you can improve upon or practices

you should avoid.  Also, you may find that you don't like the type of business or industry at all and rather than

already being financially committed you can quit and look for a job in another area of interest.

 

Just my 2 cents, hope it helps.

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Three practical experiences.

 

Buy existing, buy with partners, and have a plan to at least triple the biz within 4-5 years. You are spraying gasoline ($, people, talent) on an existing blaze.

 

Plan on day-1 to sell out to a major. Your job is to prove concept & develop the market for that major. Cash on the barrel & little discounting.

 

Maximum 8-12 years from start to finish. If you have a 50 yr working life, don’t put more than 20% of it into any one venture. Life happens, & you are a different person at T+10, than you were at T.

 

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My understanding is some of you on here are actual business owners.  Would like to post a question to gain some insight to know where I need to focus my attenion since this is different then just owning stocks.

 

Would like to own my own business in a few years.  Focusing on businesses that are already in operation.  If its an idustry that I have no experience in, then would use a few years to gain the experience.

 

Do you have any suggestions on what path to go down, books to read, or things I need to consider?  While there are articles on the internet most of it seem like they were written by someone that has never done it before or doesn't really provide any meat.

 

Not really 100% sure on where I would like to focus my energy but would like to stay out of the food, retail, internet industries.  Been thinking about manfacturing precision tools.

 

Most of my experiece has been with database marketing in the financial and healthcare sectors.    Have experience operating a farm in runoff but it is not something that would be repeatable.

 

Would deeply value any insight you could provide.

 

99% of successful, new businesses arise from the budding off and rerooting of experience, competence and insights gained in the same field or in a closely related field. I've never met anyone,  other than the face in the mirror, who built a successful business from scratch in an unfamiliar field. 

 

There is a limited exception to this rule.  Start ups based on a successful franchise are more likely than not to have modest success on a small scale.

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By buying an existing profitable business due to the owner retiring wouldn't that cut out alot of the risk?  You already have the talent in place and machinery to handle existing customers.  Sure you would need to gain some knowledge but would think the main focus would be scale.  Am I naive in my thinking?

 

 

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By buying an existing profitable business due to the owner retiring wouldn't that cut out alot of the risk?  You already have the talent in place and machinery to handle existing customers.  Sure you would need to gain some knowledge but would think the main focus would be scale.  Am I naive in my thinking?

 

One would think it is easy to succeed in a successful, small business, but many  acquisitions disappoint because the new owner doesn't know the ropes.  It isn't uncommon that the supposed profit of the operation really isn't there.  The previous owner's contacts and relationships may not be transferred easily, particularly if the new owner has different abilities than the original owner.  Some businesses, such as restaurants or retailing, are graveyards. 

 

It's like buying stocks.  The first key to success is realizing that the stock isn't merely a price that goes up or down, but a real company that may be a good business or a not so good business.  Long  term success means being able to separate the sheep from the goats and then being able to pick the prize winner from the herd or at least culling out diseased livestock and then buying a healthy animal at a bargain price.

 

Unfortunately, if one makes a mistake buying a small business, it may take years to get out of it, unlike the stock market where you can exit sadder but wiser as soon as you realize what an idiot you were.

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In a good number of the small businesses I have come across, the value is tied to a key persons ability to either know the customer well or be known in the industry as an expert in a niche.  This is a point you need to do good due diligence on.  For example in the tool and die business, a lot of the jobs are one off jobs for specific clients and relationships are important.  In this business, alot of firms have founders who have spent a lifetime developing relationships and you need to think about how or if these can be transferred to yourself.  They may not be but working in the business can give you a feel if that is the case before you spend money in the business.  Just my 2 cents.

 

Packers

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In manufacturing some things are pretty constant.

 

Relationships are critical as XYZ small biz is often a spin-off from a bigger player. Something happened way back, & a senior exec bought out a LOB; or a senior exec got pushed out & established XYX small biz as a satellite to their old employer. Key person(s) risk.

 

Technology creates the opportunities. Typically a very large capital investment to buy the machinery, a need for some very skilled expensive & hard to find staff, & not enough usage for the large firm to make its hurdle ROI. So... the investment is outsourced to XYZ small biz which splits the risk over 2 or more major clients (ideally) & a number of other smaller ones.  Everybody wins.

 

A material new technology investment may easily run to 15-20M, & is not financeable until a reputable buyer issues a material purchase order. The initial financial risk is on the owners, & often beyond the ability &/or willingness of those owners. Additionally, the buyer is also not going to make that commitment unless they know you.

 

Lots of VC’s around, but very few want to operate (or know how to). Your major asset is that you can replace the owners, not the $ brought to the table. Existing owners also don’t have to grow their business, selling out to a major is always an option ... provided the biz’s scale is large enough.

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In a good number of the small businesses I have come across, the value is tied to a key persons ability to either know the customer well or be known in the industry as an expert in a niche.  This is a point you need to do good due diligence on.  For example in the tool and die business, a lot of the jobs are one off jobs for specific clients and relationships are important.  In this business, alot of firms have founders who have spent a lifetime developing relationships and you need to think about how or if these can be transferred to yourself.  They may not be but working in the business can give you a feel if that is the case before you spend money in the business.  Just my 2 cents.

 

Packers

 

 

Yes. I know someone just like what you describe.  He had a small tool and die shop and made a good living making prototypes for a large soft drink company and other similar clients who appreciated his skill in turning their ideas into feasible products.  He also had ISO certification to produce simple parts to exacting standards which provided intermittent work from companies that needed something in a hurry.

 

He sold his business to an investor who ran it into the ground in less than a year. :-[

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there must be an asymmetry of information between buyer and seller. If there isn't, don't expect a good deal. Without a good deal, don't expect an outstanding return. Usually, the seller has better information, but not always. If you see something they don't see, you can negotiate the types of deals that are worth making.

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there must be an asymmetry of information between buyer and seller. If there isn't, don't expect a good deal. Without a good deal, don't expect an outstanding return. Usually, the seller has better information, but not always. If you see something they don't see, you can negotiate the types of deals that are worth making.

 

Interestingly, the man who sold the tool and die shop took part of the proceeds of the sale and used that to open a pizza restaurant which lost that entire investment plus operating losses when it closed about a year and a half later.

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I'm curious — Where do you find local mom and pop businesses for sale?

 

I've seen some listed on Craigslist, there are also business brokers.  In my area at least there are some websites with business listings.

 

Like the public market you see some companies where the owner has an inflated view of worth, and then you also have companies where the price seems too good to be true.  My experience with private companies is when the price is too good to be true it usually is.

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