I've been working in real estate for a number of years and think the good times are over and have considered pivoting. Have any of you bought a small business (<$2M purchase)? What kind of things do you look for when buying a business and ways to improve it? I admit it has been quite some time since I heavily dug into cash flow statements and balance sheets.
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Hey TheDebtStar, I'm the WSO Monkey Bot and I am sad to say, but this thread is lonely, so thought I'd post in here to try and help out. Some potential topics that might help:
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I hope those threads give you a bit more insight.
Preface: this is coming as a full-time, true small business (SBA) lender and having been CFO for several true small businesses (revenues $20MM).
With that preface, and assuming that you are not talking about buying a business dependent on RE... digging heavily into cash flow statements and balance sheets for true small business is an almost futile exercise. Given the purchase price you are talking about, this is likely the same size of businesses I see every day and managed as a CFO. Given that, the true nature of revenues and cash flow are WHOLLY different than they are in a large RE portfolio or at a middle-market or public corporation. Just like at a big company, timing and regularity of revenues are everything but they are NOT as stable, regular, timely, or predictable as they are at scale. Even minor hiccups can have major impacts that last a long-time so things are just *different*. I don't think its controversial to say that big companies can make their financials say whatever they want because GAAP is a very 'flexible' tool; but small companies can make their statements say whatever they want, too, because GAAP may as well be Mandarin. Are revenues and expenses recognized in a coherent manner (much less consistently) is a real question.
Your analysis of the company and valuation should depend less on the real financials and more on the qualitative assessments such as receivable agings over time (look for consistent customers, timeliness of payments, and concentrations... along with the potential for poor financial reporting/controls), customer relationships (lots of ways to assess this), and operational sophistication.
If you want to look at ways to improve a business - start with finding out how things have been managed. Often times it is "thats how its always been" and processes are decoupled from economic realities. Or there is no way to improve them because you just can't or have not yet achieved scale. No matter how many business books or MBAs you have; there is no way for a back office made up of 3 people to automate or go lean or do whatever the hell some consultant to a large company would say.
Biggest things I would advise are finding out why the business is for sale, why it is the size that it is (market limitation? barriers to expansion? competence/interest of owner?) and to what extent the business is the current owner.
Once you find one that makes sense; all the considerations about asset purchase vs equity purchase, etc etc will just fall into place. I can't emphasize enough how true Buffett's advice about "great business at a good price" is in the small business world. Don't get hung up on all the fancy techno-stuff we know as finance people related to taxes this, depreciation that, or compliance worries. Every true small business in America is comically non-compliant with every kind of rule you can imagine. If you're serious about being a small-business owner - keep it simple and stay hyper-focused each and every day on what's important. If you ask yourself that question and act accordingly you'll be OK. Do not underestimate how much success (being defined as not failing and carving out your own little comfortable lifestyle) in small business is really just being the tallest short-person (meaning you just have to not suck and not be stupid). If you can achieve that and then work on leveling-up, you can grow and scale and get in magazines.
This is probably the best advice on this forum regarding buying and/or looking at a small business. This is something I plan on doing in the next 2-4 years. I am scheduling with an appointment with the SBA starting 2023 to lay something out to figure out the best way to approach this.
Very solid advice. As an example, I currently work at a SaaS Startup that averages ~$15MM ARR. The level of incompetence can be absurd, and the layers of management is crazy for the size team we have. There’s tons of operational efficiencies to be put in place that would really scale us up, but I see 2 blocking forces to that capability.
It’s an interesting space to be in and learn from, but even in the cool-sexy tech side of small businesses, there’s ways to improve without someone even needing to know how to code. A surprising amount of decisions are based off of gut feel, people playing political war games (which drives me insane), and straight up incompetence.
What you’ve said rings true about financials being unsophisticated and how much of success can be just not being incompetent. I think hiring the right team is also so important.
I’d get cancelled for saying this on Blind or somewhere else, but 1 truly great engineer > 5 okay engineers. 1 awful high up hire can kill a company.
Thank you for the thoughtful response. I currently have a junk removal and moving business under contract, and am probably going to be pulling out mainly due to some of the reasons you mentioned above:
He is the business. He's constantly doing the work other employees should be doing. No manager. Plus his wife works in the business, so I would have to hire another person (she is not on pay roll).
Sketchy bookkeeping. He let it slip that he often pays employees in cash. Sometimes paying other things in cash. He says he accounts for that - I doubt it with a 50% gross margin business.
When I initially looked at the business, I thought it looked pretty good being a 50% margin business based on his filed tax returns. A lot of business owners under report their income and/or live through their business (car, cell phone, etc). I think this guy is actually over reporting his income in order to qualify for more bank loans for his real estate business.
Wise move, but good for you to actually put ink to paper! Better luck with the next one.
Thanks. I got excited and moved quickly for a 2x ebitda purchase price. $1500+ in attorney fees later and I'm about to back out haha. I learned a lot though!![]()
If you're comfortable with labor-intensive businesses; you may consider looking at construction-related businesses. You're in RE now so you may have a good sense of the outlook in your market or other markets you'd consider living in... but with the slowdown imminent, there's going to be a lot of pressure on those businesses and many won't make it. Could be a chance for a weakened firm to change hands, get optimized, and seize market share as other firms fall away. I have direct experience in construction so I can confirm that knowledge of construction is helpful but not required for most non-specialized trades and that operational sophistication (like basic job costing and estimating) is not a strong suit for most smaller firms.
I could give you some more color on the construction normalization if you elect to go that route.
Spa business is a good one. Just did a start-up loan for one of those. If you haven’t looked at RMA Statement Studies as a resource for benchmarking, could be worthwhile. It’s very flawed but still a directional tool.
That’s really cool. The first one that popped up was online statements from companies during 1925. Do you have any particular links you like?
Financial planning for small businesses is largely about putting your money to work for you while minimizing the risks. In other words, it’s the process of managing your finances in a way that helps you reach your financial goals.
Financial planning for business owners also entails creating a well-thought long-term strategy for your firm. It goes beyond short-term needs like raising capital to invest in new equipment or taking out a loan to pay for general business expenses.
A good financial plan will help you determine where you want your company to be in a couple of years’ time. It should also give you an idea of how much money you will need now and in the future – which could mean establishing a retirement fund and putting aside cash for future expansion or other unforeseen circumstances.
I’ve never bought a small business myself but I’ve helped friends and family look into a few, and it’s always a rollercoaster digging through their financials. What really stuck out to me is that the paperwork almost never tells the whole storyowners run personal stuff through the business, pay some things off the books, and sometimes the business depends way too much on the current owner’s day-to-day hustle. It’s a red flag if you feel like the seller IS the whole operation. I always try to meet some employees and see the daily grind firsthand before anyone gets too deep.
One thing my buddy ran into after buying a little restaurant was cash flow crunches, especially in the off season. Banks didn’t want to hear it, but he looked at non-traditional finance and ended up talking to some of the best merchant cash advance companies instead. There’s definitely more options out there for quick funds than you might realize when you’re buying in.
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