Do Business Well

Both buying low and selling high are possible because owners know less about the value of their business than any other item in their portfolio. The market price of a house is usually known within a range of 5 percent or so. Check the current listings and the recent sales, and you can get a good idea of how much your home is worth.

If you own stocks, bonds, rare coins, or a car, there are exchanges, experts, or blue books that will give you an accurate picture of their worth. Even less liquid items such as art, collectibles, or raw desert land are rarely sold very far below some established market price.

This is not the case with very small businesses. It’s common for owners to sell for inventory value only. I’ve personally seen businesses sold merely to escape debt. You can often purchase certain rights in a business for future royalties only.

In the meantime, individuals seeking to purchase a very small business are walking around with suitcases full of money ready to pay so-called book price, or multiples of earnings plus asset value. We’ll discuss all of these ideas later.

Larger businesses are more likely to sell for full value. The very small business is the ideal candidate to be available for a song. Interestingly, some in this category merely fold their tent thinking that there’s not even enough value to offer the business for sale.

The first step in any effort to buy a business for as little as possible is to have a clear, concise idea of which variables are critical and which are not. For instance, if you want to purchase a flower shop, and among your most important criteria is a minimum annual sales volume of $350,000, you probably won’t be able to put a tight geographic limitation on your desire.

On the other hand, if geography is the nonnegotiable aspect, you’ll either need to be willing to evaluate many different kinds of enterprises that are in that area, or select a business that can be operated anywhere.

Assuming this is a situation where you simply wish to expand your current business, your first step might be to buy a company that will allow you to do more of what you currently do. If you own an Italian restaurant, you buy another.

Your second approach might be to purchase a related company. The new business should piggyback as much as possible onto your existing operation. It’s very easy to misjudge what appears to be a closely related business. Recently, my company was able to purchase a company doing seven hundred thousand dollars in sales in return for the paid, active consulting of the former owner. We believed that the match between our companies was quite good, since the customers and sales reps were essentially the same.

What we failed to consider was that the suppliers and the management style were not at all synergistic. Our basic business involves manufacturing and importing small plastic items. The new business required contracting for manufacture of garments, purchase of yard goods, elastic, thread, and other items from 150 vendors with whom we’d never done any other business. It was a disaster.

Contrast this with the decision we made many years earlier to purchase the “Snoopy” bicycle accessory division of a large automotive wholesaler. In this case the items could be sold to existing accounts through existing sales channels, and there was a single source for the entire product line. The items were purchased out of Hong Kong and delivered as finished goods to our warehouse. Every aspect of the acquisition fit with our experience, operations, and market.

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