Assessing Lower Risk Businesses Vs. Higher Risk Businesses
You’re keen on the idea—owning a business sounds like the quintessential venture for you. Buying a pre-existing business is likewise an ostensibly attainable goal. You’re ready to take action and play out your long term (or newfound) entrepreneurial dreams by prepping your process of acquisition.
If you’ve followed along with our previous articles about the business buying process, then you’re probably feeling courageous and optimistic to get started with your potential buying journey.
You’re missing the answer to your ultimate business buying question.
Village Wellth is here to help you weigh out the options. Let’s get to it.
What Makes a Great Business?
Seemingly terrific businesses come in all shapes and sizes, and as humans we interact with several diverse businesses each day.
A few of your favourite businesses probably come to mind—the hip cafe down the street, that new refill eco-friendly soap store in the mall, the made-to-wear retail boutique online or the fitness centre on Main street.
While a business may seem like it’s successful and fulfilling from an individual customer’s perspective, that same business may not be a great business to own and operate. Many businesses appear enticing from an outside perspective. Internally, those businesses often have severe operational issues like low margins and high maintenance costs.
A superb business isn’t necessarily trendy; it doesn’t have to provide a flashy product; it doesn’t need state-of-the-art equipment.
As Harvard Business School professors Richard S. Ruback and Royce Yudkoff express, when it comes to owning a small-to-mid sized business:
A great business to buy is a working cash cow—an enduringly profitable business with a consistent customer base, a reliable, stable product pool or service and the potential to grow continually.
There are no two ways around the fact that buying a business will always be an investment risk. As Arlene Dickinson expresses, when you’re an entrepreneur you’re “risk friendly.” Entrepreneurs harbour the tolerance to take risks.
According to Investopedia, “there are no perfect definitions or measurements of risk.” Think of risk as “…the possibility or probability of an asset experiencing a permanent loss of value or below-expectation performance.” Therefore, if we refer to something as a low risk investment it suggests that there is less money at stake. A high risk investment implies that there is a high chance for some sort of devastating monetary loss to occur.
It’s become a bit cliche to believe that big risks inherently equate to big rewards.
In the game of business buying, lower risk investments are typically favourable because you want to purchase a business that will guarantee incoming cash flow. As a business owner, your business is only successful if you’re paying yourself (and of course your employees) a fair salary. When you put a large sum of capital into a business, you don’t want to wait out a lengthy period to see (or not see) a reward or return on your investment. If you do, then your business venture isn’t truly ideal.
Lower risk businesses are enterprises that produce continuous profit but also have the potential for scalability.
Lower Risk Businesses Vs. Higher Risk Businesses
So, what sorts of businesses are high risk investment opportunities? Which businesses are lower risk, thus potentially better investments?
We’ve assessed the risk levels of some common industry examples. On a scale of 1-10, businesses deemed lower risk are closer to a 1 and those deemed higher risk are closer to a 10.
Village Wellth has also developed a grading system (see image below) to assess the overall quality of a business investment. A VW report card rating is an average grade given to a business based on the quality of various factors including:
*Disclaimer: These generalized rankings are merely opinions. This article is solely for informative purposes. Every industry and business opportunity is different and will employ its own set of risks. Please perform your own due diligence before taking a position for or against a company and or industry.
Large Specialty Restaurant
Risk Level 9/10 | VW Report Card Rating: C (Danger Danger)
You might have heard the saying: “how do you make a small fortune? Well… “you take a large fortune and you buy a restaurant.”
Chartered Business Valuator Caroline Troy from Troy Valuations articulates that when you own a restaurant:
The operational costs of sustaining a full-service specialty restaurant are major—food products, kitchen maintenance, staffing and so on are expensive. Moreover, the upkeep of a restaurant is incredibly labour intensive. While good restaurants tend to have loyal customer bases, restaurant goers will always be fickle because they spread their business among the vast competitive food retail landscape: people will always frequent more than one restaurant.
Industrial Print Shop
Risk Level 8/10 | VW Report Card Rating: C+ (Batteries Sold Separately)
Industrial printing has seen declining demand due to digital alternatives. The need for paper and office supplies has steadily reduced over recent years and the general trend is moving away from purchases of traditional paper products. Likewise as printing technology advances, the cost of equipment is steadily increasing. In order to provide the speciality services that most interested customers need, industrial printers need to invest in contemporary, high quality equipment. Low profit margins, increased competition and a declining life cycle stage are all areas of concern.
Bed & Breakfast
Risk Level 7/10 |VW Report Card Rating: B- (Coin Flip)
In the hospitality industry, location is everything. B&B owners are typically able to cut personal costs by living in their business properties. Operating and physically maintaining a B&B requires heavy labour and monetary costs. In addition, the customer accessibility of a B&B is often quite low because they can only accommodate a handful of guests at any given time.
The hospitality industry is changing—these days, travellers are more inclined to visit either high volume areas or use more personalized services to find accommodations such as VRBO and Airbnb.
Risk Level 7/10 | VW Report Card Rating: B- (Coin Flip)
On a corporate scale, Amazon is one of the fastest growing companies in the world. Even though Amazon has a huge customer demand, owning an Amazon storefront doesn’t guarantee extensive sales. Most Amazon storefronts have low margins. Such stores also don’t have autonomy over their business structure, rather they’re reliant on Amazon as their primary provider.
Risk Level 6/10 | VW Report Card Rating: B (A Little TLC)
In the manufacturing industry, the specific risk level of a target opportunity is subject to its particular field. Even so, any manufacturing businesses will require momentous capital to purchase. In addition, manufacturers typically face high barriers to enter. For the right purchaser; however, manufacturing can be incredibly lucrative, dependable and marketable.
Risk Level 5.5/10 | VW Report Card Rating: B+ (Middle Row Business Class)
Although the industry is mature and widely accepted, high competition and low barriers to entry along with high labour cost concentration are keeping margins from creeping higher. Housing starts are expected to decline in 2021 as concerns over inflated property values take hold, as a result, lower residential spending on landscape design is likely to have an impact on gross revenues. Depending on the business location, like in colder parts of Canada, the industry is also subject to seasonally slow periods.
Risk Level 4/10 | VW Report Card Rating: A- (Not Perfect-Almost Great)
As a predominantly private medical sector in Canada, dentistry is a highly profitable and eternally valued field.
Most individuals visit the same dentist regularly on a semi-annual basis and the cost for sufficient care is high. It’s also common for dentistry practices to employ loyal, longstanding workers and managers because they can provide high wages to their teams.
The benefit to owning a pre-existing dental practice is apparent—established practices often have large patient databases, sustainable operational structures and state-of-the-art equipment (chairs, tools, X-rays and so on). That said, this industry isn’t applicable to every interested buyer. Majority owners of dental practices must be licensed dental professionals. However, there are opportunities for secondary investors to partner with dental practitioners to run dental practices.
Risk Level 3/10 | VW Report Card Rating: A (Slam Dunk)
Plumbing is an essential infrastructure worldwide. Residential and commercial real estate fundamentally depends on plumbing services.
A 2021 plumbing in Canada industry research market report shows that “over the five years to 2024, expanding downstream construction markets and increasing economic activity are forecast to bolster the industry’s performance.”
The assets required to run a plumbing business are minimal. The predominant asset of a plumbing company is its team of certified tradesmen (plumbers). Plumbing businesses are relatively scalable—as a business grows there’s opportunity to hire more contractors and to enter into new geographic locations to access an increased customer reach.
Find Your Best Business
Every entrepreneur has their differing reasons for acquiring a pre-existing business. Correspondingly, the benefits of purchasing a business are many.
Ultimately, when buying a business, it’s imperative for you to find the business opportunity that will feed your needs and objectives as an entrepreneur and individual. You must find the business that you understand and can impart your mark on.
That said, the main reason people acquire pre-existing businesses is to access capital; the driving objective of business buying is to obtain a growing return on investment.
When determining a business to buy, don’t forget to hunt for the business with an exceptional consumer base, thriving market, proven track record and stellar operation strategy. Find a pre-existing enterprise that is scalable, low risk and equally as great for customers to engage with as it is to own and operate.