Posted 03-09-2015 4:16 pm by
A common question business buyers ask is: “What kind of business should I buy?” There are hundreds of industries to choose from. Which one is right for you?
A large part of deciding which industry is right for you depends on your background, experience, and interests. For instance, if your background is in property management and you know how a good property management company should be run, purchasing a property management company and taking it to the next level may be the right path for you.
Having that said, we suggest people use caution when they buy a business that is also their hobby. For instance, let’s suppose you love flowers, so you decide to buy a flower shop. When the business you own is also your passion, it can sometimes be difficult to make the hard choices. In order to stay in business, the business owner needs to apply logical decision making that puts making profits a top priority. When the business is also the owner’s passion, emotions can sometimes get in the way and the hard choices necessary may not match the owner’s artistic vision. This might lead to the business losing money, and any business that is unprofitable for a prolonged period of time loses its appeal. In the worst case scenario, the business owner might stop enjoying the hobby because the hobby gets associated with the negative business experience.
In our experience, some of the most successful business buyers buy a business for the purpose of making money, and keep their personal hobbies separate. You can be passionate about business ownership, financial freedom, and time freedom. You do not necessarily have to be passionate about the product or service. A garbage collection service might be an extremely profitable and desirable business with a steady and secure stream of cash flow, but not many people are passionate about the act of garbage collection. Finding meaning and purpose in your life is hard enough. Finding a profitable business that also gives your life the unique meaning and purpose you are looking for is doubly hard. We are not saying you should never turn your passion into a business, but we suggest keeping an open mind when you are looking for a business to buy, evaluate each opportunity on the merits of the business itself, and not rule out a business purchase simply because you are not passionate about the product or service.
If we are to evaluate each opportunity on the merits of the business itself, are there certain industries that tend to offer better opportunities than others? The answer is yes. While there are profitable and unprofitable businesses in every industry, each industry has its pros and cons. The retail industry, for instance, can be a hard industry to be in for small business owners unless the product is in a very specialized and niche market. The reason is that customers can easily compare apples to apples in the retail industry. If customers can buy the exact same product you carry at Wal-Mart, Amazon.com, or some other big box retailer for a cheaper price, it can be difficult to convince customers to buy from you. For this reason, many small business owners in the retail industry are forced to accept lower profit margins since they cannot compete with the buying power of big retailers.
The service industry, on the other hand, is an industry where it is more difficult for customers to compare apples to apples. For instance, let’s say two businesses both offer auto repair service, and one business charges more. Will customers choose the cheaper option by default? Not necessarily. In fact, many customers would choose to get their cars repaired at a shop they can trust, a shop with friendly and knowledgeable staff, and a shop that offers great service. In other words, it is possible for business owners in the service industry to charge premium prices by offering excellent customer service. For this reason, small business owners in the service industry are often able to achieve profit margins of 15% to 20% whereas those in the retail industry might only achieve profit margins of 10%.
Is a franchise right for you? There are pros and cons to buying a franchise. With a franchise, you get a proven business model, systems, training, and a recognizable brand name. However, you also have the ongoing expense of a franchise royalty fee. In many cases, the franchise royalty fee is equivalent to the salary of a store manager. In other words, it can be more difficult for franchise owners to become absentee business owners because the money is used to pay the franchise royalty fee as opposed to the owner of a non-franchise business who can use the money to hire a general manager, allowing the business owner to have more free time and be more hands-off with the business. Unless you own multiple franchises, you may need to be an owner operator at your business day in and day out if you choose the franchise route.
When buying a business, one should also consider how recession-proof the business is. Some industries such as the construction and travel industries tend to do very well when the economy is booming, but not so well when there is a recession. Other industries such as healthcare and accounting tend to be more stable through the ups and downs of the economy. Depending on your risk tolerance, some industries may be better fits for you than others.
At the end of the day, choosing the right business to buy should be a holistic decision that pairs up the nature of the industry with your background, experience, interests, personality, and risk tolerance. Working with a business broker who is well versed in industry trends as well as personality profiling can give you the advantage in making sure the business you buy is one that will be profitable for years to come, and one that you will enjoy owning.
Aaron Muller is a business broker in Washington State who has sold over 120 companies and facilitated over 40 SBA loans for his clients. He has in-depth knowledge of personality types and holds the Myers-Briggs Type Indicator (MBTI) Step I and Step II Certification. Contact Aaron at email@example.com or (425) 766-3940 to inquire about buying or selling a business.