I know that title can get me into trouble, but I couldn’t resist.
I had lunch today with a childhood friend (no he is not nine years old). I hadn’t seen Gary in about 30 years. He still looks the same (except for the white hair and long white beard). Anyway, Gary is in the Laundromat business. His story came back to me tonight when I was reading the article, Grow Your Sales Without Selling by Mike Periu.
All in all, it wasn’t a bad piece. He gave a handfull of suggestions to growing your small business outside the sales cycle. The first suggestion he offered was the one that reminded me of Gary: Grow through acquisitions. He offered his support for it, but then he narrowed it by industry. He wrote, “…if companies in your industry are selling at relatively low valuations, and if existing customers generate recurring revenues then growth through acquisition could be a very viable strategy.”
I always have cautioned clients about acquiring small businesses. (See my video Selling a Small Business for the flip side). Many times, a small business financial statements (and sometimes tax returns) don’t truly reflect the reality.
Gary owned a small business laundromat and found a opportunity to buy another one. The other small business was selling for a low price and it generated recurring revenues. Sounds simple? Not always. Even though these aspects exist, there are many other variables that can sink a laundromat (pun intended). For example, repairs. If you buy a laundry mat whose machines are old and breaking down, your profit margin can evaporate.
Gary, however, had a solution for that. He was (and is) mechanically inclined and had developed systems to personally fix all of his machines. Thus, his cost of repairs was usually limited to parts, even used parts.
I find that so many new small business owners do now look at the threats of a business acquisiation, or if they do, they do not have a plan (like Gary) to address them. So, though Mr. Periu offers an option in growing your small business, he fails to even mention this serious drawback.
A friend of mine bought an accounting practice. He acquired dozens of clients for a fixed fee. To his suprise the seller accountant was grossly negligent in maintaining his client’s financial records. This unexpected turn forced my friend to incur many, many hours to correct the financial records that he did not get paid for because he had acquired the accounting business. In addition, he lost a substantial number of clients.
In the small business arena, I always recommend that my clients prepare a bullet proof contract with their attorney and of course do their due diligence. It is very rare that a buyer can walk into a small business with a plan to comfront the downside like Gary did. That kind of strategy takes a special skill. If you have that skill, then you minimize your risk. If you don’t, find someone that does. Either way, you must look at all possible and develop strategies to
Small businesses usually don’t have the depth to absorb such oversights in an acquisition.