Are you buying a business or buying yourself a job?
By Ricardo Garcia · · Adapted from Chapter 2, “Business, Not a Job”
Here is the test I use on every deal: can this business pay someone to run the day-to-day, cover its debt, and still leave money for me? If the answer is yes, it's a business. If it only works with me there every day, doing the work, it's a job with a loan attached.
Why the test matters
Many first-time buyers leave a good salary, take on a personal guarantee, and end up working longer hours for similar pay. They didn't buy freedom. They bought a harder version of the job they left.
You can still choose to be hands-on. I'm an operator, and I like being involved. But that involvement should be a choice you make, not a requirement the business forces on you.
The step most beginners skip
Many beginners look at what the seller takes home and assume it's all profit, without noticing that the seller is also doing a full-time job to earn it. Always ask what it would cost to hire someone to do what the owner does today, and subtract it.
In the example business the book follows, a home health agency with $2.0 million in revenue and a 20% margin earns $400,000. Paying an administrator $110,000 leaves $290,000. That second number is the one to judge the deal on.
Signs it's a job in disguise
The clearest sign comes from asking the seller to walk you through a normal day. When a seller says no one else knows what they're doing, or that things fall apart when they take a day off, they're describing a business that runs on them. When you buy it, it will run on you. Other warning signs:
- Nothing is written down. How the work gets done lives in the owner's head.
- Customers, referral sources, and key vendors call the owner directly.
- New business comes only through the owner's personal network.
- The owner delivers the core service every day.
Missing systems or missing margin?
My first assisted living homes had almost every warning sign on that list, and it still turned out to be a great deal. The question isn't whether systems are missing. It's whether the business earns enough to support building them, including paying someone to run it.
Missing systems can be the upside in a deal. Missing margin is usually the dealbreaker.
This article is for educational purposes only and is not legal, tax, accounting, or financial advice. Examples are illustrative.