Why Buy a Business
There is only one reason to buy a business
- Leverage
- See reason 1. There are no others.
It’s not so you can buy an Audi Quattro.
It’s not so you can attract a babe.
It’s not so you can buy your own place and avoid flat mates.
It’s not so you can travel to exotic locations.
It’s not so you can drink the best booze.
It’s not for freedom.
It’s not for security.
It’s not even to provide a better life for your family.
It’s certainly not to indulge your passion. It is more likely to destroy that than nurture it. Focus is a much more important factor in business than passion.
The only reason to desire to be in possession of a business is for the opportunity it provides for leverage.
A business is a device that allows you to get you off the treadmill of selling your finite amount of time at an hourly rate and puts you in a circumstance where you can sell an endless supply of other stuff including other people’s time time at an hourly rate. If the only time you can sell is your own then the only way to increase your income is to run on your treadmill faster if you have no leverage. This is a recipe for burnout.
By doing this you lift the ceiling imposed by having a limited quota of time for sale.
A business provides the ability to attach a multiplier to the activities you undertake in order to create income.
Business income is measured as profit. It is the difference between the revenue generated by the business and the expenses incurred in generating the revenue.
Because a business essentially attaches a multiple to your costs as well as your revenues it generally puts you on a roller coaster rather than a treadmill to higher income. Many costs work independently of revenue so you can go through a dizzying ride as you alternate between making losses and reaping profits.
The pathway to an adequate profit from a business is not for the faint of heart. When things go bad, they can go spectacularly bad. When things are great they are fabulous.
The simplest example of the ride businesses take you on as they set about creating profit is by looking at the valuations of businesses listed on stock exchanges. Over the short run there is generally a lot of volatility but over the medium to long term on average they do quite well for their owners.
Someone with a job on the other hand who sells their time at an hourly rate will tend to not have to contend with the volatility inherent in the income generated by a business. The cost of that is generally lower income over the long run. It is a balance that has been struck through the ages and is not likely to change any time soon.
If you are going to enter the business world it is critical to focus on leverage. Seek it out and manage it.
Why Own a Business
There is only one reason to own a business.
- To make a profit.
- See reason 1. There are no others.
It’s not so you can change the world.
It’s not in search of a more flexible lifestyle.
It’s not to help people.
It’s not to build something.
It’s not for the tax breaks.
It’s not to be in control.
The reasons to own a business do not include the following.
These might be benefits but they are not reasons.
The only reason is to make a profit.
The leverage your business provides is something that comes at a cost.
It may be necessary to invest in plant and equipment, premises, stock and much more including things that are not even tangible.
It is going to soak up the most valuable of your commodities. Your attention.
It often takes some time for the magic to happen. There can be lags between when you start the leverage process and when the benefits kick in. As a result there are usually sunk costs associated with establishing leverage.
This is important to know from the outset because if you enter this process half heartedly and decide before the time is ripe that you would like to back out you can kiss the possibility of those sunk costs being recouped goodbye. They become a gift to the next owner.
Why Sell a Business
There is only one reason to sell a business
- Relief
- See reason 1. There are no others.
Actually, that is not quite right. There are other reasons to sell a business but in the world of small to medium businesses this is a common one.
The best reason is because it has done what you had intended it to do and met your expectations. Even so, that will come with a modicum of relief.
The sale of a business may be the final and most important step in a retirement plan. If that is the case it is hard to say that relief does not play a role. As explained above, volatility is an inherent part of owning a business and that ride can get tiring after a while. There is relief in being able to get off it by disposing of the business by sale.
It could be that the owner might want to try something different. Like taking a holiday. Or another type of business. The attention that a business requires from the owner prohibits many activities that could otherwise be undertaken unless the business is sold.
The successful sale of a successful business is a milestone in a person’s life. They often mark important watersheds where the owner has achieved a level of satisfaction, achievement or fulfillment. It can be an event like getting married, having children or getting a home.
It can also arise out of other necessities like removing toxic elements from your life. Sadly, this can be when the business has turned your passion into something to despise.
Whatever the reason, a buyer will generally want to know why a business is for sale. Prepare your answer as it will be part of the process of sale.
