The Business Buying Experiment

What I’ve Learned So Far

As I mentioned in an earlier article, I deliberately carved out time to run a bunch of experiments to explore my professional interests and gain clarity on a path forward. One track of experimentation has been the idea of buying an existing business.

The Thesis

The Baby Boomer generation is reaching retirement age.

Combine that trend with the fact that the vast majority of small businesses simply shut down because the owner never managed to build the systems for the business to operate without them, resulting in the business being worth next to nothing.

And bingo, opportunities arise for entrepreneurial readers who are willing to take on some risk (or in some cases, very little risk – more on that later in the article). It also explains why many in the investing community have been paying attention to the so-called ‘serial acquirers’ who focus solely on buying and then building up Small to Medium-Sized Enterprises (SMEs) in a specific niche.

Constellation Software is the go-to example here of a serial acquirer (and a high-quality business) being quite successful in their strategy.

Now, please don’t jump to conclusions and buy Constellation Software stock because the chart looks great. This is not investment advice (I don’t own it either). Do your due diligence. I’m just looking at the thesis from different angles and gathering evidence on whether or not I’m onto a structural trend – a tailwind.

The Experiment

I browsed all listed businesses for sale within Flanders through a number of online brokers (Overnamemarkt, Bedrijventekoop, Brookz). I was looking for something affordable (listed for less than €100K), with decent revenue (at least €250K), so that it could potentially generate a meaningful profit after wages and costs (at least €20K – giving a payback time of five years or less).

One business caught my eye: a baby store in the centre of Leuven.

I recently became a father myself, and it made me realize that retail stores selling baby products have a few things working in their favor:

• You can presell a whole bunch of merchandise before buying the stock yourself, thanks to baby lists.

• Baby lists where it’s not only the parents spending money – you have a whole bunch of people feeling compelled to spend a decent amount on the baby.

• New parents are basically suckers who don’t know what they actually need – so they end up buying more than they really need.

• You get upsold expensive items in the name of safety for the baby – because what good parent would ever compromise on that?

Did I see myself running the day-to-day operations of a baby store? No. Did I have people in mind who would be absolutely great at it and would enjoy running the operations and building the systems to work on the business? Yes, I did. Which meant I would spend some time building the business, but then have more than enough time to work elsewhere, earn my money, and not have to withdraw a wage from the business.

And so, together with the partners in crime I had in mind, I scheduled an appointment. We visited the shop and spent a few hours with the owner, a lovely lady named Kim, to understand the situation of her business.

I essentially wanted to understand the situation regarding:

Customers

• How many leads she gets and what marketing efforts are in place to generate that volume

• What her conversion looks like

• How many annual customers she serves

• Number of baby lists signed for the year

• Customer profile (B2C and B2B?)

Revenue

• Average number of transactions per customer

• Average euro value per transaction

• Total revenue

• Revenue per sales channel (online vs. in-store; baby lists vs. spontaneous walk-ins)

• The different products she sells and the revenue per product

Profit

• Cost of goods sold

• Gross margins per product type

• Gross margins per supplier

• Overhead costs (wages and other)

• Marketing and Sales costs

The visit, combined with the annual financial statements from the last five years, gave me a rough idea of the situation.

I won’t disclose any specific details about the business, as I want to respect the confidentiality of Kim’s ongoing sales process. So I’ll just conclude by saying that I am not moving forward with buying the business. Mainly because it’s the first time I’ve ever engaged in a conversation to buy a business, and I don’t have other experiences to compare this opportunity to. Buying a private business is very different from buying a piece of a publicly listed company. You only really know what you’re doing once you’ve explored a hundred of these opportunities.

When I shared my story with a friend who’s also been exploring buying private businesses, he mentioned the concept of ‘seller financing’—a way to buy a business with almost no money down. The fact that I’d never heard of it confirmed I had no clue what I was doing.

“Education is learning what you didn’t even know you didn’t know.” – Daniel J. Boorstin

The experience of exploring the purchase of a small business expanded my circle of “things I know I didn’t know” and helped shrink my circle of “things I knew I didn’t know.” The fact that I lack a clear understanding of the path to successfully buying a business and turning a profit itches at me. Not seeing the path simply highlights the need for further learning and exploration. So let’s try to move this subject into the circle of “things I do know.”

From Eye Rolls to Insights: Business Buying 101

Sometimes, life has a funny way of throwing things in your lap just when you need them. As part of another track I decided to explore—business coaching (more on that in a future article)—I was gifted a book by Arnout, master licensee of a large business coaching franchise in the Netherlands and Belgium. Like often happens with business books, it had the cheesy title Billionaire in Training by Bradley J. Sugars. As we Belgians do when we see a title like that, I rolled my eyes—but then decided to read it anyway, because you don’t want to make the mistake of throwing the baby out with the bathwater. And guess what? It offered a bunch of practical knowledge on how to successfully buy, build, and sell businesses. I really enjoyed the read, recognizing many value investing principles along the way.

Here are some key points I learned about buying a business:

• Great opportunities exist for those willing to look: Look at a minimum of 50 businesses, make an offer on 10, negotiate on 3 of those, and get financed for 1 out of 3 opportunities.

• Assume the business you’re buying is worth zero (not the listing price), and have the owner explain why it’s worth more.

• You make your profit when you buy, not when you sell: Buy cheap and have a clear idea of how to increase the value of the business.

• There are three ways to own a business:

  1. Starting it yourself — investing your time and money in marketing and sales to buy customers

  2. Buying retail — paying close to the listed price (e.g., on a broker website)

  3. Buying wholesale — the best deals come when you’re not in a rush, assume the business is worth zero, and the seller urgently needs to sell (divorce, sickness, tiredness, pregnancy, travel, or just burnt out). In these cases, the seller might accept a cash loss but still see the deal as a win-win since price wasn’t the deciding factor.

• Where to find deals:
  Newspapers, specialist magazines, brokers and agents, shopping center managers and leasing agents, landlords (especially for struggling businesses not paying rent), bankers, and repossession officials stepping in after business failures.

• How to finance the deal:
  Your own savings, family and friends, bankers (loans), investors

• OR no-money-down deals:

  • Zero price: You pay nothing upfront but take over leases and fixed costs (yes, sometimes sellers are that desperate)

  • Vendor finance: The vendor loans you the purchase price, paid back monthly from business profits. You avoid interest; the vendor can repossess if payments aren’t made.

  • Knowledge buy-in: Negotiate partial ownership based on hitting targets (e.g., doubling turnover in 12 months). You need a strong reputation and expertise for this.

  • Landlords: Negotiate rent-free periods when taking over a bankrupt business repossessed by the landlord.

• Have your investing rules defined upfront. Some exemplary rules:

  • The business is surviving despite itself

  • Focus on cash flow, not assets (avoid businesses with high capital expenditure)

  • Favor low-skill businesses (makes hiring easier)

  • Favor staple products or services — ones customers already want, so you don’t have to convince them to buy, just to buy from you

  • Look for bad sales and marketing — so you already have a list of fixes to improve fundamentals

  • Hire a great jockey — someone you trust to run the business so you don’t have to in the long run

  • Have a clear plan on how and when to realize a high upside

  • Only purchase after negotiating a great deal (ideally no-money-down)

  • Define your buying price upfront — if it’s not met during negotiations, walk away

There’s lots of deeper nuance behind each point. So if this sparked your interest, just buy the book.

Conclusion

I didn’t buy any business—yet—but I learned a lot from the process. I plan to explore more opportunities in the coming months and years. After investigating at least 50 deals, I might finally pull the trigger. I also see some interesting synergies with business coaching— a topic for a future article.