Anyone had experience buying a small business?

[vagon]

I'm thinking about alternative investment opportunities and wondered if anyone had bought a small business and could offer some insights.
What are the pros/cons?
How do you do due diligence?
What sort of industries would you avoid?
Any other tips and tricks?

[2Cent]

It really depends on the type of business, but don't think of it as an investment like stocks or a house. Think of it more like buying yourself a fulltime job. Because most likely you will have to do most of the work to organize and run the place. So in terms of FIRE, you should have an exit strategy. Else you'll be working forever to keep the business alive.

I would look for an industry you understand and have some love for(as you will be pouring in a lot of your time and money). Also look for good trustworthy people to help you, and be very careful with who handles the money. And make proper agreements upfront in contracts. I know several friends who where a partner misused the business money for his own ends and ended up losing their business. (I believe MMM has even had that experience).

The best type of business is the type that you can hand of to someone else safely.

Oh, and watch all the episodes of Dragon's Den and Shark Tank. :)

[lakemom]

Due Diligence....aside from the financial side of things you need to really study the business (and business model) to see what makes it tick.  Is it a $1million business due to the hard work, salesmanship, and charisma of the current owner?  Or, is it a $1 million business with systems and people in place who will keep it humming along at that level regardless of ownership.  Not every business can survive the change in ownership.  I know 2 personal stories (mine and a mentor) of thriving businesses that went down hill quickly due to change in ownership.  So take care that you REALLY know how the business operates.

[vagon]

Thanks guys, seems too involved for the return.

[Cpa Cat]

Personally, I've only ever seen it work well when the transition was a natural one where the buyer was already involved in the business. IE: Long time owner retires and sells to long-time employee.

I know of one franchise sale that worked (old owners were losing money, new owner turned the location around) - but several more that failed.

For the most part, the buyer loses money when purchasing a small business from an unrelated seller. Almost no business truly "runs itself." I would absolutely never recommend to anyone that they buy a small business unless they are planning on being on the ground, on location, actively participating. Good staff is no substitute for personal involvement. Also, it's incredibly difficult for an owner to tell what staff members are really the good ones from afar.