Are You Buying a Business or Just Buying a Job? 3 Real Small Business Deals Analyzed
Buying an existing business can be a great way to become an entrepreneur without starting completely from scratch.
You may acquire existing customers, employees, equipment, established revenue, and a reputation in the marketplace.
But there's an important question that many first-time business buyers overlook.
Are you actually buying a profitable business, or are you simply paying someone for the opportunity to take over their job?
The distinction matters because not every company with revenue, customers, and employees produces a meaningful return on investment.
Some businesses depend almost entirely on the owner's labor, expertise, and personal relationships.
When that owner leaves, much of the value may disappear.
I recently spent some time looking through Reddit discussions about very small business acquisitions. I found three interesting situations involving a landscaping company, a home renovation business, and an IT network consulting firm.
Each example raises a different question about business valuation, seller's discretionary earnings, personal goodwill, and how to structure an acquisition.
Let's examine these three deals and what buyers and sellers can learn from them.
Deal #1: Is a $50,000 Landscaping Business Worth Buying?
The first Reddit post came from someone considering purchasing an established landscaping company.
The owner was preparing to retire after approximately 30 years in business.
The prospective buyer had learned about the opportunity through a friend who worked there.
Here were the numbers.
| Business detail | Reported information |
|---|---|
| Asking price | $50,000 |
| Average annual revenue | $384,000 |
| Owner's annual salary | $60,000 |
| Average annual reported profit | $10,000–$15,000 |
| Employees | 3, excluding the owner |
| Seasonal staffing | 1–2 additional part-time workers |
| Business history | Approximately 30 years |
| Revenue model | Includes recurring monthly contracts |
The buyer wasn't expecting passive income.
They planned to operate the company full-time and hopefully grow it.
They wanted to know whether the $50,000 asking price was reasonable and whether business valuation multiples should be applied to the reported profit or include the owner's salary.
Those are good questions.
But before calculating a valuation, there are several things I'd want to investigate.
What Kind of Landscaping Business Is This?
The word landscaping can describe several different types of operations.
Some businesses specialize in lawn mowing and property maintenance.
Others build patios, install interlocking stone, plant trees, or construct outdoor living spaces.
Those activities have different labor requirements, equipment needs, customer relationships, and seasonal patterns.
The Reddit post mentioned recurring monthly contracts.
That suggests at least some of the revenue may come from regular property maintenance.
But we don't know how much.
We also don't know whether the company provides winter services such as snow removal or salting.
That matters because a landscaping business in a seasonal climate may generate most of its revenue during only part of the year.
The buyer needs to understand the actual services, revenue mix, seasonality, and workload before deciding whether the opportunity is attractive.
The Owner's Workload May Be Greater Than It Appears
The post described the owner as someone who just runs the admin side of things.
That wording caught my attention.
What does running the administration actually involve?
Does the owner answer customer calls?
Prepare estimates?
Schedule employees?
Purchase materials?
Handle complaints?
Manage contracts?
Collect payments?
Supervise jobs?
Those responsibilities can add up to a substantial workload.
An owner who says they only handle administration may still be working long hours.
And if you're buying the company, you'll need to perform those duties or pay someone else to handle them.
That cost has to be considered.
Why the $60,000 Owner Salary and $15,000 Profit Matter
Let's assume the business earns approximately $15,000 in annual reported profit after paying the owner a $60,000 salary.
A buyer might look at those figures and conclude that the company produces $75,000 in seller's discretionary earnings.
That's a reasonable starting estimate, subject to confirming the financial statements and making appropriate adjustments.
But here's the problem.
Seller's discretionary earnings is not the same thing as profit available to an investor.
For a small owner-operated business, SDE often combines the economic benefit of the owner's work with the return generated by the business.
When you buy that business, you're effectively wearing two hats.
You're becoming the operator.
And you're becoming the investor.
Those are different roles.
What Seller's Discretionary Earnings Really Represents
As I explain:
"Seller's discretionary earnings is actually a budget." —David C. Barnett
From that budget, you may need to cover your own compensation, acquisition debt payments, capital expenditures, taxes, and other financial obligations.
Consider a simplified illustration.
<text color="secondary" weight="medium" size="xs">ILLUSTRATIVE ANNUAL CASH FLOW</text>
| Item | Amount |
|---|---|
| Estimated SDE | $75,000 |
| Owner compensation | −$60,000 |
| Remaining before other obligations | $15,000 |
That $15,000 isn't necessarily free cash flow.
The company may need to replace equipment.
You may have borrowed money to fund the acquisition.
There may be taxes or other obligations to consider.
And you need a financial cushion for unexpected expenses.
So even though the business appears to produce $75,000 in SDE, the investment return could be much smaller.
The Hidden Risk: Landscaping Equipment Replacement
Another important issue is the equipment included in the $50,000 purchase price.
The Reddit post didn't provide an equipment list.
We don't know whether the company owns several trucks, trailers, commercial lawnmowers, or specialized landscaping tools.
We also don't know their age or condition.
That's a major information gap.
Commercial landscaping equipment can experience heavy wear.
A mower operating throughout the working day requires far more maintenance than the machine someone uses occasionally at home.
Eventually, equipment must be repaired or replaced.
These future expenditures are known as capital expenditures, or CapEx.
Why CapEx Changes the Value of a Small Business
Imagine buying a landscaping company that generates $15,000 in annual profit beyond the owner's compensation.
If the business needs to replace a major piece of equipment shortly after closing, that expense could consume a substantial portion of the cash generated.
This is why you cannot value a business using a multiple of SDE without understanding its capital requirements.
You need to investigate:
The equipment included in the sale
Its age and condition
Maintenance history
Expected replacement schedule
Current market value
Any financing or liens associated with the assets
An equipment appraisal may be useful if machinery represents a significant portion of the transaction.
The buyer needs to know not only what the company earns today, but also what it will cost to keep operating.
Is the $50,000 Asking Price Reasonable?
Interestingly, I don't think the asking price is necessarily far off.
But that doesn't mean the business is a good investment for everyone.
Let's look at the situation differently.
Suppose you've always wanted to operate a landscaping business.
You understand the industry.
You've worked in landscaping or construction.
And you're prepared to manage employees, customers, scheduling, and equipment.
How long would it take you to build a new company generating approximately $384,000 in annual revenue?
It might take a year or two.
Possibly longer.
You'd need to find customers, purchase equipment, hire employees, and develop a reputation.
By purchasing this existing operation, you may be able to skip much of that startup process.
You're acquiring a head start.
And that has value.
Why I Might Offer $30,000 Down and Seller Financing
If I were interested in this business, I might propose a structure such as:
| Payment | Amount |
|---|---|
| Cash at closing | $30,000 |
| Seller-financed balance | $20,000 |
| Repayment period | 18 months |
| Approximate monthly principal payment | $1,111 |
This is an illustrative structure before any negotiated interest, security, or other terms.
The idea would be to allow the acquired operation to help generate the cash required to complete the purchase.
But I'd still need to confirm that the company could comfortably support those payments.
And I'd want to investigate the equipment, contracts, customer relationships, and actual owner workload.
My Verdict on the Landscaping Business
For someone with industry experience who wants to operate and grow a landscaping company, this could be a reasonable opportunity.
But I wouldn't approach it as a passive investment.
As I explain:
"I don't necessarily consider this buying a business. I consider it buying a job or a head start." —David C. Barnett
You're paying for an established operating platform that may help you avoid some of the difficulties of starting from zero.
Whether that's worth $50,000 depends on what you're actually receiving.
Deal #2: Should an Employee Buy His Boss's Home Renovation Business?
The second Reddit post involved an employee whose boss had offered to sell him a small renovation business.
The company performed residential remodeling work.
That included electrical work, plumbing, framing, tiling, flooring, painting, and bathroom renovations.
The operation consisted of the owner, the employee, and a part-time helper.
The employee had approximately seven or eight years of experience in the trade and had worked for the owner for five years.
He already handled many of the technical tasks.
At one point, he had even managed job sites while the owner went out to prepare estimates.
But he was worried about taking on the additional responsibility and stress of owning the operation.
He wanted to know whether buying the business or entering a partnership would make sense.
My first question would be:
What exactly is he buying?
The Difference Between a Renovation Company and a Skilled Tradesperson
A small renovation operation can be a profitable way to earn a living.
But that doesn't automatically make it a transferable business.
Imagine a contractor who works with one helper.
Customers call because they know him personally.
They trust his workmanship.
They recommend him to friends.
And they hire him again when another project comes up.
The customer relationship is largely connected to that individual.
Now imagine a larger renovation company.
It has an office.
An employee handles incoming inquiries.
A salesperson prepares estimates.
Several foremen supervise different crews.
And customers recognize the company name rather than depending entirely on the owner.
Those are two very different situations.
The second operation has more of the organizational structure that allows it to continue functioning after ownership changes.
The first may be little more than a skilled individual selling their labor.
Where Is the Customer Goodwill?
The renovation business in the Reddit post appeared heavily dependent on the owner's relationships.
The company reportedly had recurring work from rental property owners.
But that doesn't necessarily mean those customers would continue using the business after a sale.
I used to own apartment buildings.
I had tradespeople I called regularly because I trusted them.
Often, there wasn't a formal contract.
I simply knew who did good work.
If I called the same number and someone different showed up, I might give that person an opportunity.
But whether I continued using them would depend on their performance.
That's the risk here.
The buyer may think he's acquiring an established customer base.
But those customers may actually be loyal to the current owner.
When the owner leaves, the relationships may leave with him.
Personal Goodwill vs. Business Goodwill
This distinction is fundamental when valuing small service businesses.
Personal goodwill is the value associated with an individual's reputation, relationships, expertise, and personal involvement.
Business goodwill is value associated with the company itself, including its systems, brand, employees, processes, and transferable customer relationships.
In the renovation example, much of the goodwill may belong to the owner personally.
That's why I would be cautious about paying a large amount upfront for the supposed value of the business.
The buyer could end up paying for customer relationships that don't survive the transition.
A Better Deal Structure: Turn the Owner Into a Salesperson
Rather than immediately purchasing the entire operation, I would consider proposing a different arrangement.
The employee could take over the day-to-day operations.
He would manage the projects, employees, scheduling, and administration.
Meanwhile, the existing owner could gradually step away from physical renovation work.
Instead, the owner would focus on customer relationships and sales.
He could answer inquiries, meet prospective clients, and prepare estimates.
And the new operator could pay him a commission on the work he brings in.
Why Commission-Based Transition Payments Make Sense
The important difference is that the former owner would be paid based on the business he actually generates.
Instead of writing a large check for customer relationships that might disappear, the buyer would compensate the seller when those relationships produce revenue.
For example, the arrangement might involve:
The employee taking responsibility for operations.
The existing owner continuing to handle sales and customer relationships.
The new operator paying commissions on qualifying work.
Customers gradually becoming familiar with the new operator.
The seller eventually retiring from active sales.
Continuing commissions on specified recurring customers for an agreed period, perhaps three years.
The details would need to be negotiated and documented carefully.
But the principle is useful.
The seller has an incentive to introduce customers and help maintain relationships.
The buyer avoids paying a large amount for goodwill that may not transfer.
And the transition happens gradually rather than overnight.
Why This Is Similar to Selling an Architecture Firm
I often use architecture firms as an example of personal goodwill.
Imagine a well-known architect whose designs have been featured in magazines.
Clients seek out the firm because of that individual's reputation.
If someone buys the company, the buyer may want the architect to remain involved for several years.
Why?
Because the buyer needs time to transfer the relationships and reputation from the individual to the organization.
The same principle applies to the renovation business.
If customers are hiring the owner personally, the buyer needs a transition process that encourages those customers to continue using the company.
That may be more valuable than purchasing the business outright and hoping everyone stays.
My Verdict on the Renovation Business
I wouldn't rush into paying a substantial purchase price for this operation without understanding what is transferable.
There may be tools, equipment, vehicles, or other assets worth purchasing.
But the customer relationships require special attention.
A commission-based transition could allow the employee to build a more independent operation while compensating the existing owner for the business he continues to generate.
It may also allow the retiring owner to reduce his workload without immediately losing all his income.
For both parties, that could be more practical than a conventional business sale.
Deal #3: How Do You Sell a Small IT Consulting Business Built Around Your Expertise?
The third Reddit post came from a business owner rather than a buyer.
He operated a network consulting company.
The business had been operating for approximately ten years.
It generated revenue through annual service contracts.
The owner described it as very profitable, with little overhead beyond payroll.
He had one junior-level employee.
But there was a significant problem.
The new owner would need the same technical skills as the seller or would need to hire someone with those skills.
The seller wanted to know how to find a buyer.
Should he approach a competitor?
Should he hire someone to replace himself and eventually sell the company to that person?
Those are interesting options.
But they create different risks.
The First Question: How Profitable Is the Business Without the Owner?
The Reddit post didn't include financial statements or actual earnings figures.
So we can't calculate a reliable valuation.
But I would want to understand what the owner could earn if he took a job with a larger technology company.
Suppose his technical expertise would command a substantial salary in the employment market.
That compensation represents an economic cost of operating the business.
If the company reports strong profit because the owner isn't paying himself a market-level salary, the profitability may be overstated from a buyer's perspective.
Normalize Earnings Before Calculating Business Value
When evaluating an owner-operated service business, you need to distinguish between the return on the owner's labor and the return on invested capital.
Imagine a consulting business reporting $180,000 in earnings before accounting for the owner's compensation.
If replacing the owner with a qualified professional would cost $150,000 annually, only $30,000 remains before considering other necessary adjustments.
Those figures are hypothetical.
But they illustrate the issue.
A company may appear highly profitable until you account for the cost of replacing the person who performs its most important work.
That's why normalized EBITDA can be particularly useful when evaluating small professional service businesses.
It forces you to consider what the company would earn if it had to pay someone else to perform the owner's responsibilities.
Why Hiring a Replacement Before Selling Can Be Risky
One possibility would be to hire someone with similar technical skills.
The owner could train that person, introduce them to customers, and gradually reduce his involvement.
Eventually, the new employee might purchase the business.
That sounds reasonable.
But there are two concerns.
Risk #1: The Replacement Salary Could Eliminate Most of the Profit
If the business needs to pay a qualified replacement a substantial salary, there may not be much profit remaining.
The owner might discover that the company is less valuable as an independent investment than expected.
Risk #2: The Replacement Could Develop Their Own Customer Relationships
Once the new employee becomes familiar with the clients, they may develop relationships of their own.
If the proposed acquisition doesn't happen, the seller may worry that the employee could leave and compete for those customers.
That doesn't mean the employee would necessarily behave that way.
But it's a risk the seller needs to consider.
The business's value may depend heavily on relationships that aren't protected by organizational systems or long-term contractual commitments.
Why Selling to an Existing Competitor May Be the Better Option
For this type of business, I'd look seriously at a strategic buyer.
A strategic buyer is someone who already operates a business and sees value in acquiring another operation.
Many sellers immediately imagine a large corporation.
But that isn't necessarily the best buyer.
In this case, I might look for another small network consulting company with an experienced owner.
Perhaps the buyer is somewhat younger.
They've already been operating successfully for several years.
They have technical expertise.
And they're interested in expanding.
That could create a natural fit.
Why a Similar-Sized Buyer May Be Attractive
An existing IT consulting business may already have the systems and technical knowledge needed to serve the acquired customers.
The buyer might not need to hire a highly paid replacement for the retiring owner.
They may be able to absorb some of the work into their existing operation.
They could also acquire the junior employee and potentially use the additional revenue to justify hiring another technician.
That could make the acquisition more valuable to them than it would be to someone starting from scratch.
And the seller would have an opportunity to evaluate the buyer's technical competence before completing the sale.
Both Buyer and Seller Need to Perform Due Diligence
Here's something important about acquisitions involving personal goodwill.
The buyer is worried about losing customers after the seller leaves.
But the seller may have concerns too.
Suppose the transaction includes seller financing or payments based on future customer revenue.
The seller now depends on the buyer's ability to operate the business successfully.
If the buyer provides poor service, customers may leave.
And that could reduce the payments the seller receives.
So both parties need to investigate each other.
What the Buyer Needs to Investigate
The buyer should examine the annual service contracts, renewal history, customer concentration, profitability, technical obligations, and dependence on the owner.
They also need to understand whether contracts can be assigned or transferred and what customer approvals may be required.
What the Seller Needs to Investigate
The seller should consider the buyer's technical capabilities, customer service philosophy, financial position, operating history, and management experience.
If the seller will receive payments over time, the buyer's financial reliability becomes particularly important.
As I explain:
"Everyone has to do due diligence on each other, both sides." —David C. Barnett
This is especially true when the transaction involves continuing payments tied to the performance of customer relationships.
How to Structure the Sale of a Small IT Consulting Business
For this type of operation, several payment structures might be worth considering.
The appropriate structure depends on the actual financial statements, customer contracts, and risk allocation.
An upfront payment: The buyer pays an agreed amount at closing for the assets, contracts, and other transferable business value.
Seller financing: The seller receives part of the price over time, subject to negotiated repayment terms and protections.
An earn-out: Some of the purchase price depends on future performance, such as customer retention or revenue.
Revenue-based payments: The seller receives an agreed percentage of qualifying revenue generated from transferred accounts over a specified period.
These arrangements can help bridge disagreements about how much the customer relationships are worth.
But they also create additional risks.
For example, a seller receiving an earn-out may have limited control over how the buyer manages customers.
That's why the agreement needs clear definitions, reporting requirements, and appropriate protections.
My Verdict on the IT Consulting Business
I would focus on finding an established operator with the skills and experience to take over the customer relationships.
A similar-sized company may be a better fit than a much larger corporate buyer.
The seller could help with the transition and potentially receive a combination of upfront money and future payments.
But I wouldn't assume the business has substantial transferable value simply because it has annual service contracts and reported profits.
The real question is whether the customers will continue paying after the owner leaves.
What All Three Small Business Deals Have in Common
Although these examples involve different industries, they share several important characteristics.
Each business depends significantly on the owner.
Each has questions about the transferability of customers or operating responsibilities.
And each requires careful consideration of how much financial benefit remains after compensating the person who performs the owner's work.
That's why small business acquisitions can be difficult to evaluate using simple valuation multiples.
When SDE Multiples Become Misleading
Many small businesses are discussed in terms of multiples of seller's discretionary earnings.
But when most of the SDE represents compensation for the owner's labor, applying a multiple to the entire amount can produce misleading conclusions.
Imagine two companies that each report $100,000 in SDE.
In the first business, the owner works 60 hours a week and performs nearly every important function.
In the second, the owner works 10 hours a week because trained employees handle daily operations.
Those businesses may have very different investment characteristics.
The headline SDE figure doesn't tell you enough.
You need to understand the labor, management, capital expenditure, and risk requirements behind the number.
Buying a Job Isn't Necessarily a Bad Decision
I want to make an important distinction.
Buying yourself a job isn't automatically a mistake.
For some people, it can be a perfectly reasonable way to become self-employed.
Suppose you're an experienced tradesperson who wants to operate your own company.
Buying an established operation with equipment and customers might be easier than building everything from scratch.
You may be able to generate revenue immediately.
You might inherit employees who already understand the work.
And you may have a foundation for future growth.
Those are meaningful advantages.
The mistake is paying a price based on the assumption that you're acquiring a passive investment when you're actually acquiring a full-time operating responsibility.
Evaluate the Opportunity Based on Your Goals
If you want to replace your employment income and build a business over time, a small owner-operated company may fit your goals.
But if you want a business that produces substantial returns without requiring your daily involvement, these opportunities may not be suitable.
The key is understanding what you're buying.
Five Questions Every Buyer Should Ask Before Purchasing a Very Small Business
Before making an offer on a small owner-operated business, I'd encourage you to answer these questions.
1. What Does the Owner Actually Do?
Don't accept a vague description such as handles administration.
Understand the owner's daily responsibilities, working hours, technical contributions, and customer relationships.
2. What Would It Cost to Replace the Owner?
Estimate the market compensation required to hire someone with the necessary skills.
This helps distinguish operating profit from compensation for labor.
3. How Much Capital Will the Business Need?
Investigate equipment replacement, maintenance, working capital, and other ongoing investment requirements.
A company that generates cash but constantly needs expensive equipment may produce less free cash flow than it initially appears.
4. Will Customers Stay After the Sale?
Understand whether customers are loyal to the company or the individual owner.
Review contracts, customer concentration, renewal history, and the proposed transition plan.
5. Can the Purchase Price Be Structured Around Actual Performance?
Consider whether seller financing, commissions, or other contingent payment structures could help manage the risk of customer relationships failing to transfer.
Not every seller will accept these arrangements.
But they can be useful when much of the business's value depends on future performance.
Final Thoughts: Understand What You're Really Paying For
These three Reddit discussions illustrate why very small business acquisitions require careful analysis.
The landscaping company might be a reasonable $50,000 opportunity for someone who wants to enter the industry and build on an established foundation.
The renovation business may be better transferred through a gradual, commission-based arrangement rather than a large upfront purchase.
And the IT consulting company may be most attractive to another established operator who already has the technical skills to serve its customers.
Different situations require different solutions.
But the underlying lesson is the same.
Don't assume that revenue, customers, or a long operating history automatically make a business a valuable investment.
You need to understand what the owner contributes.
You need to determine how much profit remains after accounting for that contribution.
You need to evaluate equipment and other capital requirements.
And you need to consider whether the customer relationships will survive the ownership transition.
Sometimes you're buying a business.
Sometimes you're buying a job.
And sometimes you're paying for a head start that could help you build something much larger.
Any of those outcomes might make sense.
But only if you understand the difference before signing the purchase agreement.
Get Help Buying, Selling, and Valuing a Small Business
If you're considering buying a small business and want to understand how to evaluate opportunities, structure offers, analyze cash flow, and manage acquisition risks, explore my Business Buyer Advantage program.
It includes online training, group coaching, and consulting services designed to help prospective buyers approach acquisitions more confidently.
Explore Business Buyer Advantage
If you're a business owner thinking about retirement or selling your company, my team and I can help you understand the process, prepare your business for buyers, and explore your exit options.
Learn More About Selling Your Business
For a deeper understanding of business valuation, equipment values, and how owners, buyers, lenders, and advisors should evaluate financial performance, explore my book Business and Asset Values: How Owners, Buyers, Sellers, Lenders, and Advisors Should Think About Small Business & Equipment Value.
Explore Business and Asset Values
You can also find more articles, videos, books, and educational resources about buying, selling, financing, and managing small and medium-sized businesses on my website.
And if you'd like practical business acquisition insights delivered directly to your inbox, join my email list and receive 7 free gifts.
No comments:
Post a Comment