Finding mom+pop businesses with growth potential can be difficult. If there is no growth you might not be able to squeeze any money out of the business at all. I recently did due diligence on the highest rated bakery in our area owned by a couple that did just about all the work but wanted to retire. Unfortunately all the profits became their salary. Replacing them meant their replacements' salaries would eat all the profits too. Their weekly sales were the same regardless of how many days they were open because new customers were rare and existing customers either squeezed into or spread out to whatever hours they were open. 40 other local bakeries meant competition was stiff. Everything was cash so an accurate audit was essentially impossible.
Perhaps Teamshares is good at identifying acquisitions with sufficient margins to permanently afford Teamshares services, but if I was an employee at a company being bought I'd be concerned that after the owners retired with their cut and after Teamshares kept extracting their fees, I'd be left holding the bag, ie, a non-growing company slowly dying.
Makes sense. At https://www.teamshares.com/brokers , if you click on "Download buyer's profile", it says a few things that suggest they've taken that into account:
> Due to our specific needs, we are often forced to pass on good businesses.
And they want companies with:
> at least two managers or supervisors supporting the owner in bookkeeping, dispatch, sales, or project management
And:
> Our structure requires the inclusion of certain expense items (like presidents, finance leads, and/or general managers) that other buyers may not have to factor in. This means sometimes our price comes in lower than an individual buyer who benefits from that salary.
Somewhat related, I feel like probably every city in the U.S. has a family or two that have seemingly sewn up the new-car dealership businesses in their respective communities.
> Unfortunately all the profits became their salary.
Genuinely, why is this unfortunate? It sounds like the workers in the business are getting to keep the value they create, and were more likely to be committed to the business as a result.
It means the business can't practically be sold - if you buy it and have to spend all the profits on someone to manage it, you make nothing for what you've spent. You could buy it and manage it yourself, but then you're effectively paying a significant amount of money for a very difficult job - might as well just go get a job for someone else.
That ultimately means that the business itself isn't worth anything, so when the owners decide they don't want to manage it anymore, it'll likely just have to fold.
If the business can't be sold, all of those people lose their jobs.
Also, the owners presumably took a significant financial risk in starting the business, which hasn't paid off. It really baffles me when people think that employees, who aren't taking out personally-guaranteed SBA loans and risking losing it all in order to start a business, deserve all of the profit from the business. They deserve to be paid a fair wage, but people who actually take the risk to create something deserve to capture the upside.
It's unfortunate for the potential purchaser of the business.
"Unfortunately, my friend ate his entire birthday cake." It's not unfortunate that my friend ate the cake (though it probably actually is, that's not why it's used there). It's unfortunate that I don't get to have any of his cake.
For some people, building up the business is both a job and an investment. When they get old, they want the business to have enough value that they can sell it and pay for their living expenses during retirement. Or they want to be able to pass the business on to their kids so their kids are set up to make a good living.
If the business's only value is that it can provide full-time employment to someone, then it has worked out as a job but not as an investment.
There's no one right way to do it. You could instead pay yourself a salary, invest the money in other stuff (maybe through IRAs or individual 401k), and just shut down the business when you retire. And for your kids, send them to college and let them find their own careers.
It really depends on why you got into business in the first place. Maybe you just like working that way better. Or maybe you're good enough at it that you think you can get better returns by investing in your own business than you can by buying a stock market index fund.
If mom & pop doing the labor wanted to retire by selling the business, they can't. What might have been an asset isn't. So they either keep working even though they are of retirement age, or they close up shop with a smaller nest-egg.
I feel like that's simple reading comprehension. The "unfortunately" isn't like in the context of whether that fact is good or bad in general, but specifically in the context of whether or not it was a good business to buy.
What OP probably means that business was able to pay a living wage for owners and nothing more. So there was no additional cash for hiring manager, not even thinking about something for "new owner".
If you are happy to walk away and hand the "business they work at" for free to someone, flame on. Thing is, unless that is family, who would you give it to and why?
>Of course it can be sold. To someone else who wants to run a mom-and-pop operation.
It's a small market of people who are just rich enough to buy that business, don't have another job already and don't mind working that business. And that market is already filled pretty well by franchises. It's not impossible to sell the business obviously but if they were only making eg. 100k a year there is really no market for buyers for that because if you need to take out a big loan to buy it you might make nothing and if you can afford it you have better options. It's more common in these cases from my anecdotal experience, especially for something like a restaurant, that whoever buys it will restart the business completely with a new sign, menu, ect. after the last one shuts down. This is especially true in big cities where the owners usually lease the shop. What do they really have? Why would I buy a sign and menu from them for x hundred thousand dollars if I have another option?
The individuals founding the bakery took a risk in firm formation (incorporation, initial lease collateral, equipment loans which may have been cosigned by the owners as individuals, etc.). The rewards received were purely salary based -- exactly what a worker receives. The net result is that while the owners of the business received a return (a good salary), this return is not a capital return based upon the risk absorbed as founding which may have been greater.
Do you think the margins were low because they just used higher quality ingredients and did not doing any food management? If so the next owner can optimize these inefficiencies and extract value from the brand value.
Usually it’s more structural than that. Too much competition, too few customers, too little scale to afford the type of talent that can optimize inefficiencies. There is a reason these small localized businesses tend not to produce outsized profits.
Serious question - If all the profits go to the workers' salaries and nothing is left to pass through to the owner, who would have an incentive to guarantee the workers' salaries if revenue falls short? Who would be willing to risk capital to get the company through unexpected hard times? Should the workers chip in to keep it going?
I mean, the owner is a worker. These are not mutually exclusive roles.
If times are tough, then the owners probably take a smaller salary for their labor, or the workers can decide how to cut costs together through salaries, benefits, reducing costs of manufacturing, or whatever.
The owner is a worker AND an investor. If they're actively working in the business, they deserve to be paid for that labor. Regardless of whether they're actively working in the business, they deserve to be rewarded for taking the extremely risky step of creating a small business, which in turn created all the jobs for those workers.
Perhaps Teamshares is good at identifying acquisitions with sufficient margins to permanently afford Teamshares services, but if I was an employee at a company being bought I'd be concerned that after the owners retired with their cut and after Teamshares kept extracting their fees, I'd be left holding the bag, ie, a non-growing company slowly dying.