Jun 2, 2009

Building a Business vs. Buying a Business

Let's talk about mind-set.

There are two very opposite approaches - two mind-sets - to consider when you're faced with buying a business you intend to build upon, rather than to merely invest in.

When buying a business, or any investment for that matter, you must be cold, unemotional, and considerate of only specific, relevant facts.  You must consider the macro economics of the business, the industry trends, as well as the micro economics of the business and how it operates and competes and wins new customers.  

The key to understanding most of this data, and to being a great investor is to consider the PAST.  

Too many get caught up in trying to predict the future.  Let me give you a little secret: to the extent that you're trying to predict the future, you're no longer an investor, you're a speculator, gambler, or if you're lucky - a prophet.  You're also straying from facts when you veer from the path of past performance - the future is anyone's guess - an opinion.

Stick with the facts when investing.  Avoid opinions.

Investors consider the past as the best indicator of the future.

Just as Warren Buffet, the world's greatest stock market investor would say: "the rear view mirror is always clearer than the windshield."  (note: it'd be a dumb thing to disagree with Buffet on a topic like investing. )

So, when it comes to investing, I'm more inclined to use the left brain, the analytical, data-driven component of my mind.  I try to keep all emotions out of the equation - no matter how much I really want to own and operate and build a particular business that matches my talents, passions, and abilities.

I've put 2 offers in on businesses in the past week - and both were, arguably "too low" as the sellers would say.  And while I really would enjoy running these companies and improving their performance - I know also when someone is selling me on my own interest and passion.  You gotta be neutral.

It's amazing to me how many sellers and brokers want you to pay more for a business than its actual worth -- all because it "has potential" or whatever.  Do your research.  Check the Pratt stats (http://www.bvmarketdata.com/) and the business reference guide (https://brgonline.bbpinc.com/mybrg.asp) to find out how much similar companies in the selected industry are actually selling for.  And be prepared to spend a lot of time educating the seller to help them "see" what their company will most likely sell for.  

But again, don't get emotional.  You'll loose your negotiation if you're spending a lot of time and energy trying to convince someone of any point.  

Now let's take a step back.

What do you do when you own, operate or are in the process of building a business?

Throw everything I said about being non-emotional, cold, and logical out the window.  For now.

When you're the entrepreneur or business owner, you must have PASSION for the business if you want the business and your people to thrive.

Experiment, take risks, try new things, shake it up, think and breathe and eat creativity and make the business as fun a place for you and everyone else as possible.  

When you're the entrepreneur, it's about HEART more than it's about head.  And to the extent that the head has a part, it's the right-side of the brain that's most employed - thinking creatively, etc.

Peter Drucker said that 80 percent of a business's success in start up was due to doing things somewhat consistent with the industry norms, and introducing only 20 percent new innovation.  (Think logic, investing upon your initial endeavor).  That is, if you come up with something WAY "out there" you may be spending too much time and money educating a not-quite-ready-for-it market.  He further explains that once you're IN the business however, those ratios flip - that is, innovation and experimentation become 80% of the game, and doing things the "old and true" methods should go down to 20%.  I like those ratios: make the initial plunge research based (80/20), and once you're in it, make sure you're swimming like hell (20/80).

So where are you?

Looking for a business or investment (mind-work/logical left brain/cold-hard facts/viewing the past)?


Building a business (heart-work/creative right brain/living with passion/making the future up a you go)?