Today, I was referred to a potential small business buyer and manager. He has some cash but is looking for an equity partner… maybe. While I’m grateful for the referral, I also sniffed out a few problems. Being the nice guy that I am, I wanted to save the individual from some serious bruises from the day dream colliding with reality. Here is my email with only slight edits to protect the innocent:
Hi, Dan.Thanks for calling. Sometimes it saves a lot of time to just cut through schedules and simply call.
Unfortunately the CEO Lunch on Oct 26th at Fountain Square is full. We limit the size and proportion of new people in order to keep the case studies fruitful for the regulars. If you remain interested after the next few paragraphs, I’ll add you to the invitation list for November.
Buying a $5M company with $200-500k down and needing a $250k salary is a recipe for challenges. I won’t say it cannot be done but my experience after looking at hundreds of small businesses is that this caliber person at the helm is overkill. The debt service will also make this difficult. If a business owner wants to draw out $1M in dividends per year that’s fine. As a passive owner, I want to see cashflow reinvested for growth or allocated toward alternatives elsewhere in the fund. I’m glad to pay millions per year to a stellar individual but rarely do these little companies need that.
Given the above, I would recommend you either look for a professional service companies where you can work three full time jobs (direct pro-service labor, sales and admin… only slightly joking.)
Most of these little companies can make higher returns by employing three people for <$80k per year than one rock-star. If the company requires a rock star to function, I’m inclined to pass and/or re-arrange the company to make it less dependent on that. Again, I’m not saying don’t do it, but owning a business should be about obtaining large returns on invested capital by performing the minimal amount of work.
To that end, if you want to own small businesses and generate wealth without work, you might want to consider investing in a small business and keeping the day job. If you want to get out of the grind at work, I would recommend starting or buying something small while keeping your day job. Work the second thing nights and weekends until you feel confident you can do it better than the team that’s there. I know people that have done this and agree that it taught them a lot about the category.
These are some strong opinions to someone I’ve only met over the phone. Throw them out if you’d like.
I’d welcome you to the CEO Lunch. It’s not exclusive to LEV and is a way to learn faster with more people attacking the same sorts of problems.