Photo by Chase Chappell on Unsplash
We have been helping people become entrepreneurs through buying a business, but we never went viral on social media advocating for it. Others have, and that’s how the ETA acronym came about: Entrepreneurship Through Acquisition. We have to admit, it sounds a lot more impressive than “buying a business,” but that fancy label of ETA might get people so excited they miss important caution flags.
Caution Flag 1: Buy Out of State
The advice online is to not limit yourself to your immediate geographical area and to use the Internet and technology to your advantage: see what’s out there. That makes some sense, after all, we sell businesses across the country. But we put up a caution flag for those who have never owned a business before making their first business purchase, one that is not local to them.
Why the caution: When you are not local, you have no real ability to observe operations. You won’t hear customer complaints yourself. You won’t see problematic staff acting out. You may be looking at the numbers, but you won’t be feeling the atmosphere. There’s going to be a delay between the reality on the ground and your realization of that reality.
Caution Flag 2: Use Leverage to Buy
Some of the ETA gurus encourage people to use home equity or other assets to acquire the business. On our side, we’ve seen people bring a variety of asset mixes to the table to close a deal. But it’s important to note that part of what makes a deal bankable is the objectivity of the underwriters. They don’t have the optimism or hope of the buyer. Banks aren’t just looking at the numbers; they are also assessing the buyer’s past management experience and industry experience, and how well the buyer fits into this new operation.
Why the caution: When you guarantee debt with other assets outside of the business being acquired, the risk is not limited to the business but extends to your credit and other assets.
Caution Flag 3: Hire a Manager
“The business runs itself, just hire a manager and collect the checks.” It sure sounds nice, but that’s not a dream we sell here at Apex to first-time business buyers. While it is true that a business can easily be made an absentee one over time, and even at the time of purchase, new owners should always be around an “absentee” business for the first year, to make sure they go through a full fiscal cycle, and really understand how the business works. If they take the time to do that, then they know exactly who they need to hire.
Why the caution: There are two issues here. Firstly, it’s not so straightforward to “just hire a manager.” Hiring is its own challenge and it may take time to find the right person. If you assume the business will be run by a manager from the start, that means you’re going to be doing a search while you’re also trying to close the business. Not extra stress we like to put on first-time business owners. The second caution is tied to the out-of-state issue we discussed above. How will you know that your manager isn’t just surviving, but thriving? Sure, that person is responsible for reporting, but just as you won’t be able to observe the team in the work environment, you’ll only ever see your manager in video calls.
Apex Green Flags
So the three cautions above point towards green flags we love to see in deals for first-time business buyers:
- Focus on local deals
- Ensure that buyers understand the operations of the business
- Verify that key staff and systems are already in place
- Manage the leverage
Absentee ownership is the result of robust business practices, and it can be sustained and perpetuated only by those who understand and use the practices that created the possibility of absentee ownership in the first place.
Are you looking to chase our green flags? Contact us today.