Chapter 6: Identifying characteristics you want in the business

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  • established
  • profitable
  • probably should look for a dull business
    • same customers every year
    • growing slowly
    • i.e. enduringly profitable
  • don't buy a troubled business because the price is low
  • customer retention after purchase is crucial
  • slow growth
    • high growth means new customers will outnumber old ones
    • new customers bring new demands and new troubles
    • new customers without no history have no loyalty
    • high growth attracts new competitors
    • new competitors + new customers with no loyalty = low prices
    • high growth business = higher purchase price, bigger risk of failure, more work
    • low growth + dull = less risk, less worry, less work, lasting relationships with customers, recurring revenue, lower marketing and sales costs, fewer surprises, and cost less to buy
    • slow and steady wins the race
    • buy a dull business and live an exciting life
  • appropriate size
    • between $750k and 2m in annual pre-tax profits is ideal
    • big enough to financially reward your efforts
    • larger sizes attract private equity money and raises price and reduces returns
  • good match for your skills
    • general management skills wrt people, marketing, production, legal, accounting
    • make sure seller doesn't have a rare skill that will be hard to replace
    • don't buy if company cannot be understood after due diligence
  • good match for your lifestyle
    • location of business
    • family life
  • buy a business, not a job
    • make sure customers value the products and services of the company and not the sellers (and in the future your) contributions
    • individual providers should be swappable when they move on
    • it should continue to generate income when you retire
  • ignore passion for the business -> you want a dull business
    • be passionate about making money and building a life you want
    • don't confuse hobbies and social causes with a good business
  • ignore the price of the business since it is not restricted to how much money you have in the bank
    • the higher the price the lower your percent ownership but this is a percentage game so that's fine

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  • 5 months ago by vince