Jennifer (not her real name) wants to buy a business. She is 52 years old and was just reorganized out of her job at a well-known Nashville healthcare company. “I’m tired of not being my own boss, I want to be in control of my future,” she told me when I asked why she wanted to buy a business instead of finding another job in Nashville’s vibrant healthcare ecosystem.

As Jennifer described her motivation, I couldn’t help but think back over similar conversations I’ve had. I get these calls when people have some kind of mid-career crisis that makes them think the challenges of corporate life are no longer worth it. They see business ownership as their exit plan to a better life. But once I walk the entrepreneurial aspirant through the economics of business acquisition, they suddenly recognize that corporate life might not be so bad after all. 

Two questions help me frame the conversation. I first asked Jennifer how much cash she had available to invest. I then asked what she needed in terms of annual compensation. Answers to these two questions set the table for exploring options. Here’s how it went with Jennifer …

She said she could invest $250,000 and would need to make at least $150,000 per year. I explained that the amount of leverage she can get will be a function of the type of bank loan she gets and her risk profile. While an SBA-guaranteed loan has some advantages, there are many reasons to not want to go there (a topic for another blog post). Having said that, I explained to Jennifer she should assume a bank would loan an amount equal to her equity, meaning she would have to find a business on the market for $500,000 (equity of $250,000 plus debt of $250,000). I then explained that a business selling for $500,000 probably has annual cash flow of $150,000 to $200,000. I then explained that debt service on the afore-described $250,000 loan would be around $45,000 per year (assuming a seven-year amortization). Putting all this math together, I summarized she would be spending around $250,000 of equity to buy a business that has after-debt service cash flow of $110,000 to $160,000.

Even if that math worked, I explained to Jennifer the reality of business ownership (this is the part they never really think about). Businesses this small often come with “issues”. In addition, more times than not, you are buying the business from the owner/operator who has a 24/7/365 level of involvement. That’s a very different lifestyle than being a corporate executive.

While it is not my goal to talk people like Jennifer out of the idea of buying their own business, I am deeply committed to helping people understand the pros & cons of the idea. Too often, when facing a corporate crisis, the potential entrepreneur assumes the grass is greener on the other side of the fence, rarely paying attention to the cost of getting to the other side of the fence and what it takes to be successful once you’ve made the leap.

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Tennessee Valley Group

Jim is an attorney (non-resident status with the Missouri Bar) and though he no longer practices law, he has read and negotiated enough legal documents to fill a cargo tanker. He has an MBA from Harvard Business School and knows how Wall Street and private equity operates. Jim is a Tennessee Supreme Court Rule 31 listed general civil mediator with tons of experience helping business owners (large and small) work through sensitive problems to achieve winning results. He is the author of "Home Run, A Pro's Guide to Selling Your Business, Seven Principles to Make Your Company Irresistible."

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