Buying a Business? The Best or a Fixer Upper?

My occupation centers around helping business owners analyze their assets and coaching them on decisions as to whether or not they should sell all or part of their businesses.  As such, I am privy to a wide variety of business information and I can tell you first hand, I tend to see a lot of bad operations.  Additionally, based on my experience of having owned and operated several businesses myself, I also coach buyers on what to look for in a business and how the process of buying a business works.  So it is not uncommon for me to skew to the negative side of things and to look for warning signs that could potentially hurt either party in a business resale transaction.   I don’t enjoy searching for the negative aspects of business, but I know them and I work hard to seek out, identify, and mitigate the impact that these risk factors may have on either party.

However, I don’t always find things that are bad.  And during this time, with all the doom and gloom of our present economy, I thought I would share a story with you about an operator that stood above the crowd and ran an excellent business.

Several years ago, before I began to specialize in the sales and acquisition of convenience stores, I worked as a transactional broker in multiple industries.  One of which was the hotel and motel industry.  At the time a friend of mine happened to own a boutique hotel in the Caribbean on the island of St. Croix, U.S. Virgin Islands.  One day he mentioned to me that he was tired and since he had owned the hotel for several years he had decided to sell it so he could spend more time with his family.  I agreed to help him and began to review his books and records.   Upon initiating my review, one of the first things I noticed was that he was doing a good business…a very good business.  By that I mean he was running a 90% occupancy rate and had been for several years.

It wasn’t like he’d just had a good year or two; he had been having very profitable years for quite some time.  When I asked him how he had managed to get the occupancy rate to 90% and keep it there, he said that over the years, during the slow seasons, he would make several small changes to the property to maintain a fresh business.  Every six months or so, he made sure to do something different to his hotel.  It could be a new painting on the wall in the lobby or new trash containers or new towels, etc.  But he would always make some change or add something new for his customers to see.

When I asked him why he did that, his reply was, “My customers expect to see something new all of the time.”  He explained, “You see, even though a lot of my customers may be transient, many of them are not, because I work to keep them coming back to me every year.  They enjoy their experience at the hotel and they want to see something different, even if it is a little thing.”  He also mentioned to me that when occupancy would begin to drop-off he would personally go into the town and offer air conditioned rooms to the locals for a reduced price to help fill his rooms and continue to generate cash flow.

Wow, I thought.  What a novel idea.  He went and asked for someone’s business.

So I began to work at selling his hotel. I can’t tell you how many interested people I had look at his hotel.  Finally I found a businessman and his son from Ohio who had seen the property, met with the owner and had even gotten the accountant involved in the sale of the business.  But just when I was about to write the purchase agreement the deal came to a screeching halt.  The buyer said that he could not buy the business.

I asked him why? Was it because of the asking price?  Was there something wrong with the cash flow or the numbers of the business that did not look in order?  No, it was none of those items at all.  The numbers were great and the assets of the hotel were in excellent condition.  The answer to why he could not buy the business still rings through my ears today as clear as if it was yesterday.  He said, “I cannot buy this gentleman’s hotel, because he is doing such a good job of operating it that there is no more upside left for me.”  He said, “I cannot begin to operate it any better than the present owner, because he has done everything right in operating the business and continues to do so even during the hard times.”

Astounding as it may sound, this hotel was the proverbial case of a car with eight cylinders running on all eight cylinders and doing so well that there was no more upside left in the business.   The business was doing too good to be considered salable.

It wasn’t until some years later that I encountered this same issue again.  I was contacted by a gentleman who owned about 12 convenience stores and had decided that he wanted to sell about half of them to reduce his work load.  Here again when I inspected the quality of the physical assets of the stores and reviewed his books and records I discovered that I had encountered another “eight cylinder car running on all eight cylinders”.

The man and his team were great operators.  Whenever something broke in the store or something needed replaced or maintenance on the outside, they fixed it.  I could not find a blemish anywhere and most of the stores were over 5 years old. His merchandising and floor plan was laid out well and the store traffic flowed.  Every time I visited a store they had merchandising specials throughout the store from different vendors.  All of his stores were very profitable and operating well.  I remembered the hotel in St. Croix and prepared myself for some tough sales.  But I was wrong.  I ended up selling all the stores he asked me to sell.

I know that the people who bought those stores were happy knowing they were buying excellent running assets.  And they were especially happy with the fact that all they had to do to maintain the stores success was to continue with the process of running the stores the same way that the previous owner had.

So what is the moral of this story?  When buying a business you always have a choice. You can buy a business that is an excellent running business and all you have to do is show up and do the same things that the last owner was doing. This would be like buying an eight cylinder car that is running on all eight cylinders.

Or you can buy a business that needs some attention and some tender loving care and has more upside, but will also take more work to get the business tuned up and running well. This would be the eight cylinder car that is only running of six cylinders and needs work. In other words it is a fixer upper.

Either way you go you will always generally be farther ahead than trying to start a business from scratch and doing it the hard way.  So go for it. Find the business that suits your taste and then decide if you are buying a fixer upper or one that needs only you and your time and begin to enjoy the journey.