The Best Size Business to Buy, and Why
Buying the wrong size business is a recipe for disaster. Is it true that the size of the business you choose to buy define your success? What if you could choose between a small business and a larger one? Which would you pick? What has that got to do with learning to fly a plane?
Big or small business? Both options come with their own set of advantages and challenges. My long background in business sales, business coaching and my own experience owning businesses makes the answer obvious.
Ever wondered if a small business is a smarter buy than a large one? The most obvious difference between the 2 is the lower initial investment required. Small businesses generally cost less to purchase compared to large businesses, making them more accessible to a wider range of buyers. This lower entry barrier can be particularly appealing to first-time business owners or those with limited funds.
With fewer layers of management and less bureaucracy, small businesses often offer greater flexibility in operations and decision-making, meaning owners can adapt more quickly to changes in the market or consumer preferences. This agility can be a significant advantage in industries where trends and demands shift rapidly. Another benefit of owning a small business is the opportunity to build closer relationships with customers. Small business owners often interact directly with their customers, allowing for personalized service and stronger customer loyalty. This direct connection can lead to a better understanding of customers, meaning the business can tailor its products more effectively.
What should you look for when evaluating a small business for purchase? Small businesses also come with their own set of challenges. One of the main drawbacks is the limited access to resources. Small businesses often have fewer financial, human, and technological resources compared to their larger counterparts. This limitation can hinder growth and expansion opportunities. With fewer financial reserves and a small market share, small businesses will struggle during harder times. Sometimes the owner is the business and there is a high level of dependency on the owner. In many small businesses, the owner plays a critical role in day-to-day operations and strategic decision-making. This dependency can make the business more vulnerable to disruptions if the owner becomes unavailable or decides to step back. Succession planning and finding suitable people to take over can be a challenge.
One of the most prominent benefits of a larger business is the established brand and market presence that large businesses typically possess. A well-known brand can provide a stable and predictable revenue stream, reducing the risk associated with the purchase. This brand recognition often comes with a loyal customer base and strong market positioning, making it easier to maintain and grow the business. With larger production volumes, bulk purchasing, and more efficient operations, large businesses can spread their fixed costs over a greater number of units, leading to lower per-unit costs. Economies of scale can significantly reduce costs and increase profit margins. This advantage can create a competitive edge in pricing and profitability. Additionally, large businesses often have established relationships with suppliers, distributors, and other key stakeholders, further strengthening their market position.
Diversified risk is another advantage of buying a large business. With multiple product lines, revenue streams, and markets, large businesses can spread their risk more effectively. This diversification can provide a buffer against market volatility and reduce the impact of any single negative event on the overall business performance.
What are the hidden challenges of buying a large business? One of the most significant hurdles is the higher purchase price. The initial investment required to buy a large business is usually substantially higher, which can be a barrier for many potential buyers. Securing the necessary financing and managing the associated financial risks can be problematic. Managing a large business can also be more complex due to its size and scale. With more employees, extensive operations, the complexity of management increases. Integrating into the existing corporate culture of a large business can be difficult, especially if the new owner brings different values, management styles, or strategic visions.
A small business might be the better choice if you are looking for a more hands-on, flexible opportunity with lower initial costs. The ability to build close customer relationships and adapt quickly to market changes can be particularly appealing.
Conversely, a large business might be the better option if you have the capital to invest and are seeking a more stable, resource-rich environment with potential for economies of scale. The established brand, access to resources, and diversified risk can provide a more secure and potentially more profitable investment.
How does the size of a business impact your potential return on investment? Business are generally valued based on the profit they are generating, so it is logical to assume that the more profit the business is making, the higher the sale price will be. When you buy a business, you will usually take on debt from borrowing the money to buy the business, you will likely have a mortgage on a house, and all the other general expenses it costs to live. You will be relying on the income from the business to fund your life. A mistake in running your new business will cost money. Usually in reduced revenue, increased expenses or both. That means you will have less cash at the end of the month to run your life.
I have told this story before, but its worth repeating here. When I learned to fly a plane, my instructor always told me to make sure I was 3 mistakes high. When I was learning to bank, turn, loop and roll, he insisted that I was at a higher altitude than I thought I needed. His logic was that if I was higher up and made a mistake, I could rectify that mistake before the plane hit the ground. Learning a new manoeuvre 3 mistakes high meant I could potentially make 3 mistakes before it was fatal.
This is the real advantage of buying a large business.
A new business is the same as learning to fly. You will make mistakes when you buy a business. Its inevitable, so make them 3 mistakes high. Don’t let 1 mistake mean the end of your business. Small businesses don’t have the same resilience, cashflow or resources that larger ones do. A mistake in a small business can be fatal.
Peter Nola is an Auckland based business broker, author and YouTuber with 20 years’ experience and over $100m of businesses sold, helping New Zealand business owners to buy and sell businesses.
Helping buy a business and sell a businesses without expensive mistakes
