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I want to be an absentee-owner! REALLY?

February 1, 2012

Before we delve into this too far, it is important to state that there are many people who have a specific interest in investing in an absenstee-owned business, building equity or eking out an income for legitimate reasons and, to some degree, have a mature outlook on the risks and benefits of owning a business with this trait.  Then, there are others that have no real understanding of business, have not done any research into their own personal capabilities in obtaining and managing an absentee-owned business and have a general lack of understanding of life in general and business in particular.

As you may surmise, we (as Business Brokers) have no patience for those latter people.  (We are really not nice people, are we…?)  Those are the ones that waste their time charging windmills, and waste our time in their pursuit of unrealistic objectives.  Moreover, provide them with factual information that might refute their erroneous dreams about business ownership, and they will argue themselves blue in the face to refute any reasonable arguments against their own, egocentric beliefs.  As the Rolling Stones sang:  “You Can’t Always Get What You Want.”  These are the kind of people who frequently counter reasonable arguments with statements like, “But I know a guy, who met a woman at a party, who talked to someone on an airplane, whose mother-in-law dated a guy that owned a Liquor Store, who did what I want to do…!”

Our fundamental premise here is that, by and large, you cannot get something for nothing!

There are ALWAYS exceptions to a “rule” like this.  Hitting the Powerball lottery jackpot is an example.  For a paltry investment of $1.00, you take a chance at winning $10 million, $20 million, $40 million, $80 million or more!  But remember that your chances of winning the jackpot are 175,223,510 to 1, according to Powerball’s own Web Page.

That may be okay when you are investing $1.00; but are those the kind of odds you want to entertain in investing potentially every Dollar you might have, along with the amounts you (in all probability) have to personally guarantee for the business investment you are contemplating?  And if that kind of risk is okay with you, why go through all the work and stress?  Just send us your cash and we will waste it for you on “good times”, taking all of the pressure off of you!

But if you are not willing to risk everything on a “pie in the sky” gamble, if you are looking to really succeed and try to minimize your risk, then let us move forward and really work at it.

There ARE legitimate opportunities for owning and operating businesses, on an absentee basis.  But be advised that these types of businesses normally have some very exacting requirements that allow you to own them with manageable risk and better opportunities for assuring a Return on your Investment (ROI).

First and foremost, be aware that they are normally not businesses that are cheap to open or buy.

If you are not going to be there, who will look out for your interests?  Who will make certain the business’ location is organized, clean and well stocked (where applicable)?  Who will plan for Inventory replacement?  Who will schedule Employees, make certain they show up and personally fill in for them when they call in sick, go on vacation or quit?  Who will pay the bills and deal with vendors?  Who will deal with equipment repair, or even know that the equipment is working properly?  Who will deal with daily accounting and make daily banking deposits, in a responsible way?  Who will safeguard your interests with such trivial concerns as Employee Theft?  (A BIG, BIG, BIG ISSUE!!!)

It is called a Manager.

The more “hands off” you intend to be, the more responsibility you place on your Manager.  And the more responsibility you turn over to a Manager, the more you have to pay that person.  And that means something more than Minimum Wage.  Which, of course means you need to have a business that will provide sufficient Gross Profits with which to pay that Manager, IN ADDITION to providing you with an adequate ROI.

The more you have to generate in Gross Profits, the more you would normally need to invest into the business from the very beginning.  If it is a startup, that means longer periods of loss before breaking even, and that means money out of your pocket, in order to support the losses.  If it is a business you are purchasing, that means a larger Down Payment and larger Loan Payments, which in turn means having to purchase a larger business with which to support the Manager, the Loan Payments and your ROI.

This is not just us being arbitrary in making off the wall statements.  This is basic arithmetic!  Do the math!!!

The Manager is also charged with being on the lookout for Employee Theft.

Inc. Magazine quoted a U.S. Chamber of Commerce study in reporting that: “…an employee is 15 times more likely than a nonemployee to steal from an employer. Unfortunately, 75% of employee-related crimes go unnoticed.”  The article also stated that Employee Theft losses cost were sufficiently high enough to cost each and every man, woman and child in the U.S., $400.00 per year.  Other studies had suggested that as many as 33% of all business bankruptcies were rooted in Employee Theft.  Employee Theft is possibly the biggest, single threat to an Absentee Owner’s business.

Such theft is not just a matter of an Employee taking paperclips home.  They may involve cash, and the more cash-intensive a business is, the more this kind of theft occurs.  Small amounts that are stolen add up quickly, if done on a frequent basis.  Convenience Stores, Restaurants and Liquor Stores are particularly prone to this.  Restaurants are continually hit with Employees taking product home, or serving friends and families free or with heavily discounted food.  The smaller the items being sold, the more apt they are to be stolen by Employees, as well as the public.  It is not just small businesses that are prone to this kind of activity, but the smaller the business, the more each theft can hurt the Owner, deeply.

SOMEBODY has to look out for such thefts.  That SOMEBODY is the Manager, if you are not there on a daily basis, yourself.  And you are in real trouble if the Manager is part of the problem, either by not being observant and aware, or in some cases being the thief, him or herself.  In one case, we are aware of a Manager that was part of a simple, but coordinated conspiracy with other Employees in a theft ring that allowed each Employee – including the Manager – to steal money from the business, in rotation.  Everyone took a turn and shared the booty.  One day, Fred would go home with “extra” money; the next day, it would be Ethel; the day after that, Lucy…and so on.  The difference was about 20% of lost Profits, every day the Owner was not there.  When he arrived on the scene, daily Profits miraculously shot up by that 20% figure.

Even if you are on site and in charge, theft can certainly occur.  We dealt with one business where the Owner’s longtime, internal Accountant stole $500,000 over a five-year period.  The Owner was working himself to a frazzle, trying to salvage what had historically been a very profitable business.  He blamed competition, downturns in his general industry, Internet-based sales…it was not until he retained an outside CPA to deal with an IRS Audit that he learned of faked Vendor Invoices that ultimately went into his own Accountant’s dummied up merchant accounts.

The moral is that, the more you turn responsibilities over to others, the more you lose personal control and the more you need to add in controls that would permit you to review the actions of others, from a distance.  Bar coding is a great way of controlling a certain amount of theft, but probably not for Employee Theft, in most cases.  In Restaurants, computerized order taking systems can definitely help.  But again, this is not something you see in the smallest of Carry Out or Deli operations.  More investment is needed, to offset or protect the business from theft, of all kinds.

And SOMEBODY still needs to review whatever controls are used, in order to determine what the controls are turning up.  That again comes back to either you or, if you are an Absentee Owner, your Manager.

Finally, having been a part of businesses that were small, Mom and Pop operations, Branches of larger companies, Franchise Ownerships and the Corporate offices of both Branch and Franchise operations, one characteristic hit every time:  No business ever does as well when staffed by an Employee, as it does when the Owner is actively, personally involved.  Sales levels tend to be higher; Customer Relations tend to be better; Operational Expenses tend to be lower, Waste Expense is lessened; Gross Profits tend to be higher; and innovation and creativity seem to be much more centered in an Owner/Operator’s business than by any managed operation, regardless of the level and how the Management is compensated.  The incentive of the Owner/Operator is simply better, because you, (as the Owner) are the one that has the ultimate risk and reward at stake.

Back to our original, admittedly cynical view at the start of this post, being aware and reasonable with your expectations is key.  If you have $5,000 to invest, want an Absentee Owned business and a 20% ROI after all Expenses, including Debt Service, it ain’t gonna happen unless you get one of those Powerball-like deals.  You laugh, but we see those kinds of demands with a fair amount of frequency.

Your expectations MUST be rational.  If they are not, you will either frustrate yourself into a state of deep depression, or sentence yourself to almost certain failure.

We dealt with a Laundromat Owner, years ago.  In addition to the automated Washers and Dryers, he had two (2) Employees that took care of emptying the coin boxes, and replacing the coins and emptying the bills from the change machine.  We asked what the Buyer might expect in a Net Income.  The Owner replied:  “The Net on this site is $80,000, plus whatever the Employees are stealing.”  We asked, if he knew about the theft, why he did not terminate the current Employees.  His response reflected a level of reason that bordered on complete surrender:  He said:  “I want $80,000 out of this business, every year; I get that, now.  If I hired new people, God knows how much they would steal!”

Be realistic and honest, with yourself.  Understand the risks.  Write a Business Plan that encompasses all of this!

(Receive in-depth, personal consulting online, with The BAF Group’s principal at https://clarity.fm/donaldbarrick .

The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service. Its Principal Broker possesses 25+ years of Business Sales and Divestiture. Although most of our work is involved in the Mid-Atlantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well. Some of our listings and additional information about us can be viewed at www.bafgroup.com. Thank you for your interest.)

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