Why buying a small business now is a bad idea
Normally, I am a proponent of buying small businesses.
The data shows they make the world go ’round. The U.S. Small Business Administration Office of Advocacy, which defines a small business as a firm with fewer than 500 employees, states there are over 30 million such enterprises in the U.S.
But a convergence of factors have made the economic environment less favorable to small businesses, and I would hold off on buying one at the present time. Here are a few reasons why:
- Change is everywhere. Along with the disruption caused by the COVID-19 pandemic, a change in the nation’s political leadership means there could be more regulation. The possibility of more business interruption exists. Unless you own a strong, established business in an area that has survived the first shutdown and your business is considered somewhat essential, the volatility of operating a company with interruption in cash flow means the business may not make it.
- Continuing supply chain issues. This remains an issue nine months into the pandemic. Shelves in stores are still not fully stocked. Furniture stores and other types of businesses are waiting months to get the necessary components to build inventory. Supply chain disruptions can affect small businesses in numerous ways: reduce revenue, cause issues with production, and inflate costs.
- Changing buying habits. Some buying habits have been permanently altered, and a vaccine for COVID-19 won’t substantially change those habits. There will be more online shopping and more “contactless” shopping. Anything that involves interacting with people will be affected, especially retail.
- Changing business strategies. Buying a business is about buying a cash-flow stream, but what businesses are going to be around in the next five years? Disruption in how a business operates can change its core strategy and render the business no longer viable. Think of Blockbuster Video and Netflix, or your local enclosed mall shops and no-contact shopping with Amazon.
- Tightening loans. Money is probably never going to get much cheaper to borrow than what it is now, but lenders are more cautious too. It may be easier to get a home loan for your personal residence, but getting a commercial loan to buy a business is a different ballgame and lenders are concerned about the unknown in small businesses going forward.
The solution is to slow down and really do your homework. Research and study the marketplace. What kinds of businesses have not been affected dramatically by the pandemic? Which ones won’t have additional regulation imposed on them in the future?
There are lots of businesses to choose from, but be selective. If you find a business that meets your criteria with good cash flow and a promising future, there is a good chance you may get a discount due to the unknowns of regulation and another pandemic. Not all business owners have the luxury of taking their time to sell; some have an urgency to sell. So in that scenario, there is a good chance you could leverage the reasons I mentioned to not buy a small business. Those same reasons could get you a discount on the purchase of the business.
Timing is everything in life, and with proper due diligence and good timing, you may get yourself a good business at a good price.
Terry Monroe is founder and president of American Business Brokers & Advisors (ABBA) and author of Hidden Wealth: The Secret to Getting Top Dollar for Your Business with ForbesBooks.
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