Small Businesses For Sale – How Buying a Smaller Company is Different

Buying a small business for sale, as opposed to a larger, more complex operation is a unique experience. Small business ownership truly is the ‘front line’ of entrepreneurial ism but it is not for everyone. This article will explore why small businesses for sale are unique and how owning a smaller company may be a different type of investment worth exploring.

Hands-On Owner/Operator
Many times (but not always) a smaller company requires that the owner of the venture be hand-on with the operations in order to make it a success. Unlike a larger corporation where tasks are assigned and roles delineated, a small business requires the owner to wear many different hats. Although it is possible for the owner to take a ‘silent’ role in the company, in most small business sales the purchaser is usually looking for a business where they can take an active role in the operation. This would allow them to take the company in direction that they want. Also, many entrepreneurs feel that no outside manager would be able to do as good a job running the business as they would due to the vested interest that an owner inherently has in a business.

Many People Looking to Buy a Job
Small businesses for sale are often valued on the basis of ‘Seller’s Discretionary Earning’ or in other words, the financial metric that indicates the money that an owner/operator would earn in the business. The reason that a small business for sale is valued on this basis is that buyers want to understand what their ‘take’ is for running the basis. If businesses were valued on cashflow metrics that excluded the owner’s salary, then the concept of ‘buying a job’ then becomes intrinsically less intuitive. It is a common measuring stick that is applied to many different types of small businesses. When you look at purchasing a small business, try to understand what your ‘take’ would be as an owner/operator and how much money you would have left over after serving your debt. Determine if this is enough to live off of and if it is provides enough of a return on your investment.

Buying a Local Small Business if you Know the Market
Some of the most successful small business purchases are made by people who know a local market extremely well and find a business that they can sink their teethe into – even if it was a business that they had not previously considered. Consider the example of a former steelworker who buys a bar in Hamilton, Ontario or a former Bay St. executive who buys a small marketing business in downtown Toronto, Ontario. There are many examples across Canada where a new owner’s only real value-add to a business purchase is familiarity with a local market. They key is knowing your market well enough to understand “what will work.”

Understand Your Risk Exposure
When you look at small businesses for sale, take a look at what your overall risk exposure is. For instance, if you’re considering a retail business in a mall location with $10,000 in monthly rent, then you need to understand what would happen if sales dipped by 10% – will the business be able to weather such a downturn? On the flip side, you may consider a business with extremely low overhead so the risk exposure to you on that front may be low but what if the vast majority of sales rely on a few key customers. How will you prosper if a few of them were to go elsewhere. The point is that small businesses for sale do have many of the same risks as some bigger companies. Examine the overall company very closely and try to understand what your overall exposure would be in a ‘worst case scenario’.

Buying a small business can be one of the most exciting challenges you can undertake. Contact Steve Skrlac if you would like to discuss the process of buying a small business in southern Ontario, Canada.