Naturally, different kinds of businesses will require varying but equally deft touches. It’s important to have an idea of what kind of business you’re running because you can use this information to determine a more concrete direction for your business and going forward, modify your methods to fit your operation. Michelle Seiler Tucker goes through different kinds of businesses that you may find in the world. For each classification, Michelle not only weaves together a working definition, but also lists down things that owners of such businesses need to look out for. What kind of business do you have?
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We’re going to talk about the different types of businesses and what type of business owner are you. I love the quote from Richard Branson, “Every big business starts small.” There are 32 million businesses in the United States and 99.9% of them are small business owners. You need to know what type of business owner you are so you know who’s going to be your buyers. If you want to go from one business type to a different type of business, then you need to know where you’re starting from. That’s what we’re going to talk about.
There are five different types of buyers and there are different business owners. The first category that I referred to these business owners in my book, Exit Rich, is the dreamer. There’s nothing wrong with the dreamers. This is a type of business owner that goes out and starts a business instead of buying a business. They will go out and start a restaurant, a coffee shop, a daycare, an ice cream parlor, a smoothie store, a gift store, a dress store, or any type of retail business. They think their concept is unique that people flock to it. They have a mentality of build it and the people will come. The problem is that they don’t do the research. They don’t do their due diligence first.
If they start a coffee shop, a lot of times there are six other coffee shops in the neighborhood or 100 other restaurants in the city and their ideas are not that unique. It’s not that different. What happens is these business owners start these businesses. They’ll put together a business plan or put together all their paperwork and then they’ll start the business. They’ll get an influx of customers quickly because what do consumers like? Consumers like to try something new. They want to get out of their habit, explore, and try a new business and new concept. What happens then is the business opens, they get an influx of clients and those consumers are not believing because the businesses are in its infancy stage. It hasn’t gotten its systems and processes together yet.
The owner and employees are new. The processes haven’t been defined and trained on so the service is not good. The clients and customers will come, they’ll try the business, and then they’re like, “This is terrible. I’m not going back,” and what do they do? They don’t just return, they tell everybody else how bad the business is and how bad that service is. Meanwhile, this other coffee shop, café or restaurant, happens to be that is in business and has been in business providing great service for a long time begins to decrease. Their business and profits decrease. Why? Because there’s a competitor right around the corner that’s eating off their plate. I call it cannibalizing the market place.
“Dreamer businesses go out of business relatively quickly.”
The dreamers come in and cannibalize the marketplace. Not only does it hurt that existing business’ revenues, but it also is going to hurt the business that just opened up. Even though they’ll get an influx, that is not going to stay because their systems haven’t built a solid foundation in order to create those wow experiences that keep a client coming back. That’s what I’ll call a dreamer business and they go out of business quickly. I’ve heard endlessly, “That business goes out of business because they didn’t have a good business plan.” I’m here to tell you, you’re not going to go out of business because you don’t have a good business plan. You’re going to go out of business because you run out of money. You simply run out of money. You don’t have enough working capital to weather the storm.
This is tough. You’ve got to get your systems right. You’ve got to get your people trained. You’ve got to make sure your product is thriving. There are a lot of things that you have to do, juggle a lot of balls in the air to make sure you’re going to provide excellent customer service and excellent experience to keep customers coming back. That’s why so often many of these businesses fail because they don’t have the proven systems and they don’t have enough working capital. What type of businesses are these? They could be gift stores, restaurants, cafes, ice cream, smoothie stores or daycares, and things of that nature. That’s the dreamer mentality.
The other business type is what I call the one-man, one-woman show. What that means is that there’s no business, that person is the business. Let’s look at an interior decorator who does beautiful work. They can dress out a business or a home, but that’s it. They don’t have any people. If they do, they might have an intern or independent contractor but once an interior decorator leaves, there is no business. The relationship is with that interior decorator. Think about a real estate appraiser who goes out and appraises real estate. They don’t have employees either. They’re usually one-man, one-woman show. There are some appraiser companies that do have employees. I call it job because it was him and that was it. He sold his job and the caveat was that he had to stay on for two years with the new buyer and it was tied to seller financing because of the rules and regulations that the appraiser had to sign off on all of the buyer’s appraisals for two years.
It’s some of those ways to get around this to be able to make the business sellable but it is more difficult. Even looking at a photographer, you have a photographer. That’s a difficult business to sell because most photographers don’t have employees. You can also look at a real estate broker and estate agent. A real estate broker can sell their agency if they have any agents and that’s great, however, a real estate agent can’t. You can also look at other licensed professionals such as doctors, chiropractors or dentists. If you’re used to going into your dentist and they don’t have any other dentists, it will be hard to transfer you to a new dentist where you’re very comfortable as a client or a patient doing business with your dentist.
“It gets difficult for absentee businesses to actually prove their income when they sell.”
I’m not saying these businesses are not sellable because they are, however, it takes a lot of thought and planning and it takes the owner to stay on longer for the transition to be successful. If a medical doctor, lawyer, chiropractor, or dentist knows they want to sell, they should start bringing in an associate quickly and they should plan on staying for a while. You can look at hairdressers, that’s a tough business to sell as well unless you have a salon. However, if you have a salon and that stylist has a book of business and that stylist is leaving then that book of business will have to come out of the financials. There are all these different nuances and caveats that you have to work for.
The other type of business is what I call the absentee business and a lot of us are like, “I want an absentee business, that’s what I want to buy.” That’s great but there’s no such thing as absentee in my opinion. Some of those businesses will be car washes, laundromats, storage facilities, or trailer parks. Absentee businesses are great. It can be absentee as long as you have somebody you trust as a manager to be the liaison and handle the money. You have to make sure you have a lot of checks and balances in place too because you got to make sure that nobody is stealing from you. You’ve got to make sure that the money is there.
Also, it’s hard sometimes on these businesses to prove income when you go to sell it because trailer parks are cash, laundromats are cash and car washes are cash. You got to make sure that you keep in good books and records when it comes to that. We also get into the businesses experienced but established business that has experience but still dependent upon the owner. They’ve been in business but the owner is still there and the business can’t run without the owner. That will be businesses that have 3 to 5 employees but they’ve been in business for longer than five years. Let’s look at the well-established business that has been around for many years. These businesses are good. They run on what I call the six cylinders, the solid check or 6 Ps.
These businesses as long as they are continuing to innovate and market and keep up with the client demand because consumers’ buying habits change constantly. You’re having to innovate and make sure you stay relevant and current to your buyers. These businesses are good and these businesses will sell quickly. They can be anywhere from education, manufacturing, distribution, maybe larger daycares, retail, or restaurants. Ask yourself, “What type of business am I? Is my business absentee? Does it not going to take much supervision? The buyer can come in and it doesn’t have to run it. Am I a one-woman, one-man show or the business is 1,000% dependent upon me, or without me there is no business? Is my business a dreamer?” I started my business. It’s a smoothie shop and we’re not making that much money. Dreamer businesses can be sold but they won’t sell for a multiple of cashflow if they’re not making any money. They’ll sell for the value of the assets in inventory. Turnaround specialists like to buy these types of businesses. It’s good for the dreamer to try to get more funding if need be and also take on a partner if they need to get over that hump of being able to operate at a profit.
“Every big business starts small.”
Now that we’ve talked about those types of businesses, we also talk about a small, medium and larger type of companies. Let’s talk a little bit about that. Small businesses have anywhere from 5 to 7 employees and they’re completely dependent upon the owner. These are daycares, cafes, retailers, dry cleaners or restaurants. It could be a medical building business or something like that. These are smaller businesses that need the owner in the business to be successful. You have what I call the small to medium type businesses. These are about 5 to 15 employees and they’re grossing over $2 million. The small businesses are grossly under $1 million.
These small to medium grossing over $2 million can be manufacturing, distribution, engineering, service businesses, medical and education. It could be some restaurants or retail in there as well but they’re grossing over $2 million. The small businesses will sell to first time buyers and 90% to 95% of buyers are first time buyers. That’s who your buyer will be for a small business. A small to medium-sized business can sell to the first-time buyer as well but could also sell to a competitor or a strategic.
We have our middle-market businesses and these are a larger type of companies and these companies have 15 to 1,000 employees and they’re grossing millions. They have a management team in place. They have their CEO, CFO, COO, Chief Officer of Marketing, technology, etc. They have layers of organization in their company. They can run without the owner. It’s not dependent upon the owner being there. I will tell you, there are some medium-sized to large businesses that have fifteen and more employees but the owner has not figured out how to work on his business system in his business and he or she is still stuck into the day-to-day operations and has her hand in every pot.
Just because you see a medium to larger business with fifteen or more employees, don’t think the owner is not involved in the day-to-day because many times they are because a lot of entrepreneurs like to have control. They want to know what’s going on in every single department. There are those businesses out there that have the management team in place that are the liaison between the employees and the owner. Those businesses are operating what the owner at the top as a visionary running the business, not running a job. That’s a big difference. These businesses will gross over $2 million and their EBITDA, Earnings Before Interest, Taxes, Depreciation and Amortization will be much higher as well. These businesses will sell to your strategics, competitors and sophisticated buyers too and also private equity groups if the EBITDA is high enough. That’s a medium to large-sized business.
You need to do some exploring because I get sellers all the time and business owners who call me and say, “I want to sell my business,” and it’s a one-man business. He’s a plumber, he has no employees so there is nothing to sell. I also get business owners who call me and say, “I’ve got to sell this. It’s not making any money. I can’t hang on anymore. I don’t have any money. I can’t find any money,” and it’s what I call a dreamer business. Know your business and just because you’re a dreamer, it doesn’t mean you can’t grow that into a small to medium-size business. If you’re a one-woman, one-man show business doesn’t mean that you can’t hire employees or independent contractors to help grow a business instead of having a job.
Most buyers don’t want to buy a job, they want to buy a business. In the case of the appraisal story that I told you about, that was a buyer buying a job. He wanted to get into the industry and we were able to make that happen for him. For the most part, 99.9% of buyers are looking to buy an actual company. If you don’t fall into that status, there’s still help for you. You can grow that business like Richard Branson says, “Every big business starts small.” You should go and take the quiz, “What type of business am I?” That’s at SeilerTucker.com and know where you’re coming from. Know what business you have and what business you want to be. I always tell my clients, ask yourself, “What business am I in and what business should I be in?”
It’s important so you can always grow. If you’re in that licensed professional where you’re the doctor and you’re the only doctor, then get an associate in there or plan your exit until we have a five-year buyout plan. I’m in the medical industry, I have medical practices, and we have multidisciplinary clinics with medical doctors in DC. If chiropractor wants to sell, he knows he has to get an associate or he has to have a plan to bring someone in and have a buyout plan where that associate is buying that doctor out as he’s getting to know the business, getting to know the patients, and comfortable with the transition. I hope this was helpful and beneficial. It’s been great being with you here on the show. I’m looking forward to our next show and providing more information so you can continue to grow your business and find your exit when you’re ready. Thank you.
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