Absentee Run Small Businesses - Is That Really A Possibility?
It seems like these days that's all I hear from buyers in the BizBen ProBuy Program is they want a absentee or semi-absentee business to buy. I understand why, but most buyers don't understand how difficult that is to accomplish this feat successfully. I address this with other Advisors on BizBen.
Comments & Feedback From Pro Intermediaries & Pro Advisors On BizBen:
Contributor: Peter Siegel MBA: BizBen Founder, Lead Advisor
Seems like these days that's all I hear from buyers in the BizBen ProBuy Program (educational and business buyer coaching program) is they want a absentee or semi-absentee business to buy. I understand why, but most business buyers don't understand how difficult that is to accomplish with running a small business.Here was my reply to this buyer:
Yes there are absentee run small businesses. The most important question to ask is whether there are absentee run businesses that operate satisfactorily for the owner. And that depends on the kind of business and what the owner wants to get out of it. With a few exceptions, most small businesses don't generate enough money to support someone not contributing to the company's operations.
If the owner isn't waiting on customers, providing service, managing the office or responsible for some other task that is necessary for the business to function productively, there is little likelihood that he or she will enjoy much return from the money invested. Basic economic principles dictate that a small business can only generate enough earnings to support a non-working participant if prices charged for its products or services exceed, by a significant margin, what is needed to cover the costs of producing or providing those products or services. If so, there will be money for the non-working owner. But competitive pressures in most industries work against a business that charges substantially more for what it does than other companies in the same business. it won't stay in business for very long if its customers are over-charged.
Alongside the economic principle is the human principle that suggests an owner who isn't "minding the store," eventually will discover the business is not performing as well as it could with owner involvement, or that some of the business income is "disappearing." Or both. A notable exception is the business of coin operated laundry facilities. In this situation the money is collected into the change and soap machines and a locked box associated with each washer and dryer. The owner may limit active involvement to collecting the cash and hiring someone to keep the facility clean and manage the business bookkeeping.
A few entrepreneurs are happy to be absentee business owners and to lose money or break even. Their objective is not to receive an immediate return on investment, but to be able to claim business expenses to reduce tax liability on income from other sources.
And, like some absentee gas station owners during the Seventies, they may expect that a business not providing any profits now will someday be worth substantially more than the investment and yield a satisfactory capital gain.
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What is your view on absentee run small businesses? What have been your experiences with these types of businesses? Do most owners "stretch the truth" when they say its absentee run?
Would love to hear what you have to say (include your experiences) on this topic above via a discussion and replies. Thanks.
Contributor: Broker/Consultant: Elderly Care Services
Great discussion topic! If I could take to the bank how many times a prospective Buyer were to ask me how "how much time do I have to work at the business" I'd be rich!The short answer to how much time do you have to work is; "it all depends upon the systems you have in place to successfully operate the business." In the Elderly Care Home industry it is imperative to first identify who and what type of management you are going to put into place to accommodate all the day to day activities of the business.
Are you as the Owner going to be the designated Administrator? If so, then Title 22 mandates you to be available at least 20 hours per week. Maybe you would rather hire an Employee that can act as your Administrator and then you manage from afar.
There are many different options/systems available as to how you operate your business. It all comes down to cash flow, confidence and overall health of your business.
Compared to most other business opportunities, laundry businesses are near the top of the list in absentee run businesses. In a typical model, owner involvement is about 6 - 8 hours per week on site and about 2 - 4 more monitoring, managing and general issues. This is not entirely hands off but these are very successful businesses. You might note that with some added expense, you can pay someone to do all most all of the on site work.
Contributor: Broker/Consultant: Elderly Care Services
It's all about systems and bottom line profit. The question of "how much time a week do I have to work" often comes up during the initial discovery period with a new Buyer. My "canned" response to this question is always "well, it all depends upon the amount of time and energy you put into creating the systems required to make your business operate without you."No business can be fully hands off, but with the right systems in place a Buyer can certainly find a business that provides the "passive income" they are desiring.
Contributor: SF Bay Area Business Broker
If you are looking for an absentee owner business, you are going to have a very hard time finding a business that is truly 100 percent absentee owner. Also on a scale of 1 to 10, those businesses that rank 8, 9 or 10 are going to be receiving the most interest from buyers and therefore it will be more difficult to get a great deal on these types of businesses. Therefore, when I have a potential buyer who is asking to review any absentee owner businesses, I suggest the following advice.Look instead for businesses that currently aren't absentee owner, but can be easily converted to absentee owner, while you focus on the things you are good at. For example, in a market, in a different state, I had a buyer who was excellent at generating leads for his home improvement business. Therefore, he was looking to expand into another trade so he could apply what he knew about lead generation to additional businesses. However, he was too busy to run another business, so he was only interested in other businesses that were absentee run.
I suggested the following advice. Find a business that isn't absentee run. He found a painting company, that wasn't absentee run, but it netted about 135,000 per year.
Before he purchased the business, he ran an ad for a seasoned painting company manager. He had several applications for great managers at between 60 to 85 thousand annual salary per year.
Since no one was interested in buying this owner ran business, my buyer got a great deal on the business and hired a manager to run it.
Then he made his changes to lead generation and well the rest is history. If you can be a little creative at how you look at business for sale opportunities, you will have much more success at this.
Contributor: Christina Lazuric: Business Broker
Buyers ask me about my thoughts regarding this all the time. I tell them; I remember when I was a kid cruise control just came out on vehicles. My parents were laughing at a story about a guy who got a new camper with cruise control so when he got hungry, he just left the wheel to go in the back and make breakfast! That's how I feel about absentee businesses.I think what buyers fail to realize is that if the business is absentee for the seller, it probably didn't start that way. It took the seller time to find people that he could trust and understand but that doesn't transfer to you as a buyer.The seller also has a highly developed nose for issues and detect if somethings off immediately and correct it before it becomes a real problem, that also won't be transferring.
All that said, it doesn't mean that businesses being advertised as absentee aren't going to be less trouble to manage, they are probably going to be easier because of the support in place. I tell my buyers that its foolish to think you can buy a business from day one and spend zero time there and expect everything to go well, that's no going to happen. A reasonable plan would be to work in the business as much as possible at first so you can get to know the staff, the customers and the issues that could potentially cause a problem. The more confident you feel, the less you need to be there.
Contributor: Business Broker, Northern California
The most important role in any business is the CEO or owner as their role is to not only deal with the present but also bring a vision for the future direction of the business. The CEO of McDonalds in the US just stepped down because he was unable to execute that role despite moving up through McDonalds during the last 25 years. The economy changes so quickly that I would be concerned with buying any absentee business how long it will be around. If its a successful model then competitors will copy it. If its unsuccessful the market will take care of it by not buying its product or service.
Contributor: Rick Carlson, Business Broker - Southern CA
All businesses are better off with a general of the troops. There is no substitute for an active owner-operator who is engaged in the day to day affairs of his or her business. Usually those are the most profitable businesses that we bring to market. Do most owners "stretch the truth" when they say its absentee run? My experience is that most Sellers tell the truth. But there are always the outliers, or, outliars maybe. If it's truly absentee a decent physical observation period should tell the tale on whether the claims of any prospective Seller are true. If they are not engaged for a week or two with the Company and revenues match whatever is advertised, the buyer should feel better about the purchase overall.
When talking about "absentee ownership", it's important to distinguish between "out of sight" and "out of mind". Frankly, one of the criteria I use in valuing a business and determining its sustainability is asking the owner "If you disappeared for three to four weeks, would your business not only survive but continue to thrive? If so, you have a very valuable business." And, that's one way to judge what is meant by "absentee."A business can certainly be owned and managed "out of sight" by an owner who understands the intricacies of the business, has checks and balances in place, recruits and rewards competent, honest, reliable management, and implements regular and comprehensive monitoring of the business. On the other hand, if the business is "out of mind", with the owner relinquishing ultimate control to the employees, the absentee-owner will soon lose control of his business, his revenues, and his profits.
In short, absentee ownership can be a wise investment move; but, it still requires ongoing diligence and strategic management by the person who has the most to gain--and to lose, the owner.
With proper investment of time and attention, a business-owner can be successful on an absentee basis--but, he either has to build the business with that goal in mind or buy a business that is already self-sustaining. Years ago, I started a computer manufacturing company and worked like a dog for three years building it up to multi-million dollar sales and 40 employees. My wife, two kids, and I finally took a four-week vacation to Europe--back in the days of complicated international phone calls. The second day away, I called the office, got my messages, and asked, "Does anyone need to talk to me?" After a long 8-10 wait on hold, our receptionist came back on the line and said, "No, Tim, I'm sorry, no one needs you." Two days later, I made the same call and got the same response. On hanging up the phone, I turned to my wife and said, "NOW we have a business." We enjoyed our four weeks away and found the business in even better shape than when we left. That was the reward for a lot of business-building beforehand.
Contributor: Ryan Clark: Business Broker, Southern California
Indeed fully absentee run small businesses really are a possibility thought oftentimes the truth is stretched insofar as what constitutes absentee . At present, we have 5 businesses on the market that fit what I call the Four Hour Workweek business model. The are firms that have their products manufactured abroad, import them and house them with a fulfillment firm, and even outsource customer service. The varying degrees of involvement typically depend on how much of the marketing, web development (these tend to be firms with a heavy internet focus) and customer service or backend administrative work and bookkeeping the owner chooses to do. These services, however, also lend themselves to being outsourced once a robust platform and the requisite infrastructure is created.At present we have a tech product on the market that requires less than 1 hour per week of the owner s involvement. While he s had the manufactured product for nearly 2 years, he is entirely unaware of any aspect of the company s day to day or even monthly operations. In fact, his bookkeeping is the only party with any form of oversight on the entire operation. To the owner, the company is essentially an income annuity which is what many buyers seek. Since we ve had a great deal of success with buyers wanting such opportunities, we ve actually come to start helping sellers prepare for sale by positioning their firms to mirror this business model, as we know that a low maintenance perpetuity can command a premium in the marketplace. Of course, a buyer will always need to dig to determine exactly how absentee is being defined, however, nowadays most firms lend themselves to outsourcing or placing competent and trusted staffer in place to oversee many functions.
Contributor: Transactional Attorney
While many small businesses can be absentee-run as far as the day-to-day business with a qualified manager or the right model and systems, it's very rare to find a small business that can truly be absentee-owned on auto-pilot without any guidance.The skills needed run a business day-to-day as a manager are different than the skills required to market, adapt and be proactive. Most people who make good business managers wouldn't necessarily make great business owners.
You may not have to sweep floors, sell your services or lock up at night, but it's helpful to at least understand how it gets done. You're also very likely to still need (and want) to have executive oversight as an owner. No one will ever care as much about your business as much as you do, not even a great manager. If you want your business to be successful in the long term it's your responsibility to guide it through financial, legal, marketing and competitive challenges as they come up and to plan for the business to compete in your market in the long run. You may have people to help execute your goals and visions, but you don't want to rely on someone else to set those goals and visions.
If you buy a great business it may run profitably for a long time even without your oversight, but you're eventually putting your investment at risk if you don't take any role in guiding it.
