It has become relatively common over the past few years for individuals or a group of individuals to acquire a business as an investment with no intention of being involved in the day-to-day operation of the business.
There are a few different reasons that this may occur:
- Individuals may be close, within the next five years, to retirement in a larger company and desire to have a business that they can be involved after they leave their current employer.
- Individuals may want to be semi-retired, but as they enjoy doing “business” they want to be involvement in a company, but they do not want it to be the driving force behind their life style or time commitments nor do they want the day-to-day aggravation that comes with actually managing a business.
- Some individuals may see owning a business as a better and safer investment then the stock market or other money market investments such as CDs or bonds.
- A business could provide the investor with a secondary income.
If you are considering acquiring a business as an investment it is not quite the same situation as it would be if you were acquiring the business to operate and manage. Under this circumstance there are some additional matters that you, as the investor, must take into account before proceeding to consummate the acquisition transaction:
You must consider how the business is currently being managed and operated. Are you acquiring the business from another investor or owner manager?
Buying From an Investor:
If you are acquiring the business from another investor then the staff and necessary financial controls are probably in place to allow it to operate effectively with absentee ownership.
If in fact you do acquire a business as an owner investor from another owner investor I would still highly recommend that the financial controls of the business be scrutinized. If you do not feel that you have the background or expertise to do the verification that the financial controls currently in place provide you with a satisfactory level of security on your own, then you should contract with an accountant or business consultant to do this for you. Tight financial control becomes even more critical if the business is a “cash” business (retailer, restaurant, etc.) and/or you are not located within driving distance of the facilities or where the business actually operates.
In this case, acquiring the business from an owner investor, you should determine how much time and involvement the previous owner investor actually spent monitoring and/or being involved in the business to ensure that it is at the same or lower level then you are prepared to undertake.
You should take note of where the current owner investor resided in relation to where the business is located. The current staff may have a completely different attitude towards the business and an owner investor who lives a few miles from the business and was able to and did drop in unannounced on a regular basis to an owner investor who lives on the other side of the country.
Buying From an Owner Manger:
You should, after performing due diligence feel very comfortable and confident that the current staff is quite capable of running the business without day-to-day supervision. If you are acquiring a business from an owner manager it is most likely that one of the reasons that he is selling the business is so he does not have to manage it any longer. The seller may be telling you that his business currently has a second in command that is more than capable of taking over the his duties. However, you should take into account that this individual is untried and unproven, statements such as; “I have gone on vacation for three weeks and left the business in my second in command’s hands and he did extremely well”, do not necessarily confirm that the individual can manage the business on their own. There are major differences between “holding the fort”, while the owner is on vacation and managing the business on a permanent basis, especially in the area of providing overall business direction and gaining the respect of other employees.