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Buy a risk-free, recession-resistant business

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Many years ago, I worked with an incredible individual, Jerry Efros. He was a World War II veteran, a tail gunner, and a very successful businessman after the war. He evolved into a business intermediary and did it well in the 80’s. He unfortunately died a few years ago. Every Memorial Day, we look back at the presentations we gave to a group of brokers each weekend. This was very shocking.

Jerry had some incredibly wise guidance that he was willing to distribute. One of his lines I’ve used countless times (and I always trust Jerry) is about the best business to buy. When a buyer asks him “what is the best business”, “what is a recession-resistant business”, “can I buy a risk-free business?” He always told them to “buy a tool booth.”

Jerry’s answer is more truthful than fiction. In reality, few companies are risk-free. Recession-resistant businesses may seem like a compelling concept, but they are not always abundant. And how do you quantify “recession-resistant” businesses? On the contrary, these types of businesses are generally those with limited upside during boom times.

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Accept the risk

If you want to be a true entrepreneur and want to buy a business as your car, you have to get used to the risks. That doesn’t mean reckless. It simply suggests that every business purchase is at risk. Of course, the important thing is to decide whether you can mitigate it or accept it under the agreed terms.

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Most SMEs have a mechanism to deal with risk. If it is a customer concentration issue, the buyer can have a revenue component of the transaction. These provisions allow you to adjust the purchase price if a particular customer does not continue to purchase from the company. If it is a significant employee issue, the buyer can enter into an employment contract. When assessing potential risk, buyers need to make the following decisions:

  • If that happens, what is the impact on your business?
  • Can I live together?
  • What can you negotiate in a transaction to mitigate the impact of risk?
  • If it’s too big to solve, am I ready to leave the deal?

Evidence of Recession-What Does It Really Mean?

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If the buyer wants a business that won’t decline during the recession, how can it be determined? Do you need corporate products and services regardless of macroeconomics? Determining how a business or sector works in downtime should never be left to guess. Buyers with limited information are not wondering if their business is okay.

The only viable way to undertake it is through stress testing. Review the sector and investigate how these types of businesses have progressed during the previous recession. Moreover, do you want to know what happened after that and how they worked?

“Perfect” business

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As my late friend Jerry’s previous quote points out, there is no such thing as a perfect business. Every business has warts. It may be possible to find a business that can withstand a recession and withdraw completely intact, but that is not common.

When assessing your business, address your concerns in terms of probability. Identify everything that might go wrong and give a percentage to each of the risks you realize as much as possible. This can be done by looking for experts in this field, the current owners of similar businesses, and conducting a detailed investigation. Make sure that the sum of the total percentages for each scenario is equal to 100. Then decide if the biggest ones can live together or be settled. If the answer to both potential consequences is no, then your decision not to buy it will be easier. On the other hand, if it’s comfortable to live in, adopt a true entrepreneurial mindset and be aware that there are always risks. If you can’t handle it, maybe business ownership isn’t for you.

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