I’ve just loaded 3 new videos into the Vault (click on this link, or check the VodPod Widget on the right hand side of this page for the latest) …
Now for today’s post …
Now listen up!
You want to keep working that job forever? Stop reading today’s post! If you’re determined to stay poor forever, you deserve the extra 2.5 minute break 🙂
You want to work your job AND invest in real-estate? Well, keep reading, because SOME of what I’m about to say, applies to RE, too.
But, if you want to blaze the business path … hang about, because Dustbusterz has a GREAT question for you:
Tell me here ,if I am wrong in my assessment. I believe diversifying(i.e. buying or starting many businesses) is better than having all your money tied into just 1 business.
Currently, we own about 5 small businesses, which bring in small amounts of cash. Our intent here is that we will build these businesses up gradually over a set time frame , and at the same time, continue to buy or build more businesses to add to our income stream.
By having these several businesses, we somewhat mitigate future problems if say,1 of these operations should suddenly be stricken with cancer and we are unable to restructure and save it.
So having 10 smaller businesses (1 goes bankrupt or gets sold) it is less of a drain on your income stream as having all your cash in only 1 or 2 bigger businesses.
As I said to Dustbusterz, there are some great reasons TO enter into multiple businesses and some equally great reasons NOT to …
… but, I have to admit, diversification was never on my list … until now
First, let’s look at why you might want to buy/start just one business:
– You can concentrate on it ( THE reason not to ‘diversify’)
– One business can become many through territory expansion, franchising, joint ventures, etc.
– A bigger business can be more atractive to the people who will pay you more (say, 6 years’ profits) than the typical ‘small business purchaser’ (who might only pay 3 to 5 years’ profits); these uber-purchasers include: e.g. the private equity firms, large corporations, IPO, etc.
Now, let look at how you may end up with multiple small businesses:
– The businesses are related in some way (this is how I ended up with a portfolio of businesses)
– The first business that you buy or start doesn’t have enough potential so you open up another on the side and … it just keeps rolling from there
– You are in the business of ‘flipping businesses’ … really!
Before I continue, let’s take a break to satisfy the real-estate guys:
With real-estate you can own one property or multiple … across a single location or many. It matters not, so long as you put good management in place.
And, if you decide that you are going to be in the business of flipping RE – well, then you have no choice but to be hands on with multiple properties … you just have to hope that it all holds together!
Not so with businesses; the management requirements in small business – indeed, any business – are relatively HUGE (certainly, when compared with the management stresses in real-estate). This usually points to having one business that you grow and grow, slowly and carefully adding management layers underneath you.
I believe that by diversifying, you are exponentially INCREASING management risk (hence, failure) … which may or may not offset the potential diversification ‘benefits’.
But, it can be done … as I said before, I managed it.
And so has Brad Sugarswho is a bit of a legend where I come from … I recall going to a free ‘business seminar’ and being surprised by the speaker: a lanky kid in his 20’s in a slick business suit. And, he’s gone from there to found a well-regarded multi-national business coaching company.
Brad spoke about how he would buy small businesses, often with ‘no money down’ and fix their basic money and management problems, and then sell them off. Brad often didn’t even work in the businesses himself, so I guess that you would say that he’s to ‘random’ small businesses as Ray Kroc was to McDonalds.
I particularly loved this technique that Brad shared:
1. Buy a business for as close to zero dollars as possible (this IS possible … just offering to take on the lease payments – as a take it or leave it ‘final offer’ – is often enough),
2. Install a manager
3. Help the manager build the business up
4. Sell the business to the manager (after all, they have seen how quickly it has grown!)
Personally – like RE flipping – this is a ‘business’ (that buys/sells businesses), not an investment. It’s not the kind of business that I like, because there’s no HUGE upside; although, if you can scale upwards of 50 such transactions … 😉
Most conglomerates are good examples of diversified businesses (GE comes to mind). One could also buy complementary businesses. Your risk level is affected the same way as it would be with diversifying any investment.
Your example of multiplying the management teams (and thereby increasing risk to each business) is interesting, Adrian. This is precisely one a buyer of companies is looking for (like your friend Brad) – inefficient management with an underlying fairly decent business. You buy and consolidate, combining the common management (HR, Acctg, IT) that runs across each company, combine anything else you can “leverage” (logistic chains, purchasing power, for examples), and save money, thereby reducing costs and making it even more attractive to investors (depending on which kind you want).
Good food for thought.
@ Diane – I was looking at this from a small business perspective; for an entrepreneur, the risks of spreading management (i.e. THE entrepreneur) ‘too thin’ probably outweigh the benefits … however, I am an example of somebody who succeeded without following my own advice, here! 🙂
Pingback: How to build a conglomerate … « How to Make 7 Million in 7 Years™
the franchising business is actually good specially if the product for franchise is well known.’~;