The share market is the place to find managed businesses. They sell at a multiple of earnings that are well into double figures and possess a level of liquidity that a small to medium business does not. They have people that do the work and people who direct them. Everyone gets paid. Profits count after they are all expensed.
The most important feature of these businesses is the passive involvement of the shareholders. They can own them and forget about them. That’s why they are so valuable and the markets that trade in them are gigantic. The daily trading of those businesses involves vast amounts of transactions with staggering amounts of money.
They can be quite volatile in market value because their liquidity allows any piece of information that affects the profitability to be reflected in the business’s price immediately.
Regulation of the type and timing of information that is released about these businesses means that no participant in the market can gain an upper hand over other participants.
How much attention can you give it?
There are businesses that have some important characteristics of these larger businesses but trade at much lower multiples of profit and so can be purchased much more cheaply. One characteristic is very important and makes a business very attractive.
Although it would be great to buy a business that requires no attention. There is an alternative scale to view a business which can harvest much greater rewards in some important respects than a genuine passive business.
The trick here is not to set the bar too high. Rather than purchasing a business that is purely passive in its requirements for management, there is a lot to be said for purchasing a business where you don’t have to give up your day job.
It is about breaking up the responsibilities involved with running a business and deciding which ones you can meet and which ones you can’t.
There is always administrative work that you can do after hours. Other tasks are to organise supplies, staff, providing strategic direction and more. The trick is not to look to do only tasks tasks that are easy. The trick is to look for tasks that are doable but don’t require you to give up your day job.
The benefits of this approach are significant. The income from your existing work will allow you to support the business. In addition, you remove an obligation of the business to provide you with a living wage. You already have one. The business can then use these liberated resources to be taken to the next step.
Buying a Job vs Buying a Business
The way to view it is that you are not buying a job but a business. The business becomes an asset class and you decide priorities as you would with any other asset. You remove the constraint that afflicts many ‘buy a job’ businesses which is the owner has no spare capacity. The capacity of the owner does not constrain the business.
There are things you will need to consider for making these businesses viable.
You may have to locate them in the same suburb/city/state as you.
You may need to have relevant licences so you can step in.
You may need to have a backup.
It could be your business partner, spouse or child or extended family member.
The key is to create an environment where you can manage the business from a sprinting distance away rather than a marathon distance away.
It will be an additional burden, but they are a burden on your spare resources.
Birds of a Feather
I have seen success in people who have purchased similar businesses. Tobacco shops are an example. They work because they are simple. A specialist cleaning business is another one. That worked because the critical staff were in place or possible to replace.
Be careful of some businesses, especially franchises that require you to be at the business. Some franchises work best when the owner has many of them.
One key ingredient in operating a business from arm’s length is to cultivate the environment and people to help you. Key staff who can run the business have to be on board. The best way to do that is to pay them well. Although this will reduce the profitability, the trick here is to view it as a way of assuring the profitability.
The alternative is to work in the business and maximise your income by doing more things yourself. That is the opposite strategy of one where you are trying to do less yourself. Focus on business earnings rather than owners’ earnings.
Ride the wave
As you get the first business that provides you with profits, you can use them to help with the environment to run the next one. Just remember that each of them has to contribute positively to the group. Your task will then be to keep searching and preparing for opportunities.
More than ever, these businesses appear to those who are prepared and patient. Remember the adage that the best time to plant a tree is twenty years ago. Take heart in that the second best time is today.
As you become adept at recognising those businesses and operating them, your job shifts up the scale of hierarchy in their organisation. You will look for opportunities and direct them.
Where Do You Start
When you get to this stage, it will pay to enlist help in the search.
While many businesses sell via advertising, this method of selling a business suits the business type that requires the owner to be integral to the operations. When that owner finds such a business, they will no longer be on the market to purchase one.
The owner that has an arm’s length relationship with the business is always on the market looking for an opportunity. It is then worth cultivating a relationship with a business broker or with a database that will tell you when particular businesses come onto the market. Be a member of that database and get in contact with the broker from time to time. That way you can keep them abreast of any changes you may have in what you’re looking for. A broker with a database will be diligently maintaining it so with ongoing communication.
If you would like to enter my database, please get in contact so you can receive a questionnaire.
