There’s never a “good” or “bad” time for buying a business — just like there’s not some magic bullet for deciding to go into business for yourself. If you’ve found a business you want to buy, do the dirty work of comprehensive due diligence before you make a decision.
Even in a not-great economy, some businesses will succeed — antacids and toilet paper did great business during the pandemic. Netflix has taken a beating lately because of a lower share price and subscriber drop-off, but the stock is still valued at close to $200 per share (pretty much where it was pre-pandemic).
The only question you should ask yourself about whether to buy a business is this one: will I regret it later if I don’t?
The Regret Minimization Framework of Buying a Business, According to the Gospel of Bezos
I don’t care how you feel about Jeff Bezos; he’s got solid instincts, and I wouldn’t ever bet against him. It might surprise you to hear that Bezos’s MO for investing in a new venture is to go with his gut. He asks himself this question:
At the end of my life, will I regret not having done this?
It’s pretty simple and straightforward for one of the richest guys in the world, but remember that he wasn’t always Jeff Bezos — he was some guy working at a hedge fund when he took a chance on Amazon.
Bezos makes his business decisions using this regret-minimization framework. It’s simple — only three parts — and completely cuts to the chase in decision-making. This process demands action (inaction is a decision in itself), and chances are good you won’t get it completely right the first time. That’s okay. Strategically buying a business is like any other skill you can refine. Just keep repeating “$2 trillion market cap” to yourself — that should help.
The Framework as a Tripod
The regret minimization framework is really more of a tripod that balances the business, relationship management, and where you are in your professional and personal life. Entrepreneurial life is always a bit of a high wire act, but these focal points do distill the various components into a simple formula.
1. Make the Hard Decisions
I’m not talking about the in-the-weeds stuff, where so many entrepreneurs spend valuable time. These are the hard decisions, like when your supply chain is so hopelessly backed up that you’re a year behind schedule and there are no other options for alternate vendors: do you pack it in or take the long view and power through? There are always other opportunities in business, and you’ve got to make the hard call — is this the hill you’re willing to die on?
The trick here is to separate the emotional and logical aspects of the equation when you’re buying a business. I’ll admit, it’s easier said than done to distance yourself from the mental energy you’ve already invested and review the situation from an impersonal and strictly analytical perspective.
Let’s take the supply chain example since that’s such a hot button now but isn’t exactly a new thing. There have always been snafus and shortages that cause delays; this is something that will ease with time but isn’t going away altogether.
So, you need a widget for the newest version of your product. Can another vendor provide it at scale? Does your competition already have the widget? Once you have the widgets you need, is it clear sailing to port? In other words, is this the only obstacle? Laying out the challenges in a linear and logical way helps clear your thinking so your decision to push through or bail out is based on fact, not feeling.
2. Take Emotions Out of the Equation
I’m not telling you that you should approach your business decisions with no heart or emotion. I’m telling you that separating those two sides of your brain is how you make good decisions. Very few of us make great decisions — especially the hard ones — in the heat of the moment. Also, unwinding a poor call is rarely easy. Nor is it cheap.
This is where you should rely on data and previous decisions to drive forward. Stepping away from the problem and looking at it from a purely numbers perspective gives you some clarity. If you just can’t do it — suppose you’re looking at layoffs, for example — ask a mentor or trusted friend to review the data for you. Make your decisions based on data and research, not your gut feeling. There’s a direct line connecting that gut feeling to the part of your brain that controls emotions, and you’ve got to cut that cord.
3. Set Strategic Priorities Early On
Speaking of supply chain problems, here’s how Intel charted its course back in the day. Gordon Moore, a co-founder, and engineering director Andy Grove set a “production capacity allocation rule” that would prioritize chip production. The memory chips that made Intel into Intel were losing money, as the microprocessors were clearly the future and the cash cow.
Moore was emotionally invested in that memory technology and wanted to keep dancing with what brought him — the memory chips. But the priority allocation rule took that decision out of his hands so that plant managers were able to manufacture the microprocessors.
How Does Buying a Business Fit Into Your Life?
The final component of regret minimization is how your decisions integrate into your life. The hard truth is that big life or business decisions are not an either/or choice; there are many layers and facets to consider. Also, there’s usually a cascading effect when you make the important calls — decisions don’t happen in a vacuum. There’s always some sort of collateral damage.
I’ve always advocated for an entrepreneur to have a good sounding board — a mentor, a trusted board, a golfing buddy — that offers outside perspective.
You’re the boss, and you get to make the hard decisions. Ideally, your mentor has been in your industry and has the deep institutional knowledge that only comes with life and professional experience. A mentor doesn’t have to be your best friend. Someone with a different viewpoint is usually better at pointing out the weak spots than your best friend or business partner who always agrees with you.
The Flip Side of Buying a Business — Buyer’s Remorse
For every Jeff Bezos who follows his gut, there’s an Elon Musk who’s in thrall to his ego and makes decisions that they regret sooner than later. I’ll grant you that most small and mid-level entrepreneurs don’t operate on the grand scale of the world’s wealthiest guys. But just because you’re not on CNBC and the front page of the WSJ doesn’t mean you can’t make a bad call. It just means that the Securities and Exchange Commission (SEC) probably isn’t as interested in your financial shenanigans.
My point here is that a good decision is not a hasty one. Make sure your due diligence is rock solid and the numbers support your offer and the fundamentals of the business itself. Hang in here with me; there’s more on how to ensure you’re not only buying into the right company but also doing it the right way.
Buying a Business — Pros and Cons
There are some good reasons to buy an existing business instead of creating a startup business. You might even find a business that complements an existing company you’re already invested in.
Here are the reasons to buy (or not to buy) a company with a track record.
Consider these advantages:
- The product or service is already in the market and has some success. Since 60% of start-ups fail after the Series A funding round, a market-tested company is a better bet.
- An existing brand is an established brand. Your marketing and sales teams can focus on expanding sales — generating income — because the groundwork is done.
- There’s an existing customer base that you can tap into. Thinking more strategically, if this business is compatible with your other ventures, you’ve got an expanded database for additional revenue streams.
- Finally, getting financing for a business with a track record is much easier. Sure, you can find other investors to join you in buying the company. But in general, working with a bank or the Small Business Administration allows you to keep more control of the business.
The primary disadvantage of buying a business that already exists is this: why is the company for sale? This is why I recommend exhaustive due diligence before you buy a business. Most founders go into business with the idea that a sale is the end game. But is the company really ready for prime time, or is it in distress? If it’s in distress, can you turn it around?
For every positive to the idea, there is usually a corresponding negative. Sure, there’s infrastructure for manufacturing, but is the equipment up to date? For SaaS companies, will you need to invest hundreds of thousands into software and development? There’s already a team in place, but are they the best people for the jobs? What about early-stage employees with an equity interest in the business? Can you afford to buy them out if they turn out to be deadwood?
Just because a company looks great on paper, with strong fundamentals, a great product, and a growing market share, does not mean it’s a great investment. They may not deliver as promised, or the customer support is bad. If the corporate reputation is poor, you’ll put a lot of resources into the intangibles of boosting your street cred. So be sure you have both a plan and the finances to polish the turd.
If you believe it’s really a diamond, go for it. Otherwise, there’s always the next opportunity.
In the next few weeks, I’ll dig deeper into the nuts and bolts of buying an existing business. But no matter what else I say, keep the concept of regret minimization top of mind. For entrepreneurs, failure is usually preferable to regret — as long as the money holds out.