Monday, June 15, 2026

The Biggest Lie in Business Buying: “Just Hire a Manager”

 

Can You Buy a Business and Just Hire a Manager? The Dangerous Myth of Absentee Ownership

One of the most common promises circulating in the small business acquisition world is that you can buy an established business, hire a manager, and enjoy the profits without getting involved in day-to-day operations.

It sounds like the perfect investment.

Find a profitable company. Borrow most of the purchase price. Hire someone to operate it. Then collect the cash flow while you continue working your regular job or enjoying your newfound freedom.

But there's a major problem with that idea.

Hiring a manager doesn't eliminate your responsibilities as a business owner.

And if you don't understand how the company operates, you may not even recognize when something is going wrong.

I've spent years working with small business owners, buyers, and sellers. I've seen businesses successfully transition to manager-led operations, but I've also seen how easily buyers misunderstand what that arrangement requires.

Today, I want to explain why the idea of buying a small business and simply hiring someone to run it can be so dangerous, especially for first-time buyers.


Why the "Buy a Business and Hire a Manager" Strategy Sounds So Attractive

Social media is filled with people promoting small business acquisitions as a shortcut to financial independence.

You'll hear about the silver tsunami, retiring baby boomers, and opportunities to purchase established companies using acquisition financing.

The pitch often follows a familiar pattern.

You don't need to start a company from scratch.

You don't need experience in the industry.

You don't even need to know how to operate the business.

Just buy an existing company and hire a manager.

The implication is that management can somehow replace the knowledge, experience, and responsibility normally required of an owner.

But that isn't how most small businesses operate.

A manager can handle many important tasks.

That doesn't mean they can assume every responsibility associated with ownership.

And understanding that distinction is essential before investing your money.

A Store Manager Isn't the Same as a Business Owner

Consider a large chain of corporate-owned gas stations.

Each location has a manager responsible for day-to-day operations.

That manager might prepare employee schedules, handle customer complaints, train new staff, order merchandise, and maintain the facility.

From the outside, it may appear that the manager runs the entire business independently.

But think about what happens at the company's head office.

Does the corporation simply allow hundreds of store managers to operate without supervision and review their financial statements once a year?

Of course not.

There are district managers, regional managers, and senior executives supervising the operation.

They monitor sales, fuel volumes, margins, traffic patterns, inventory, and other performance indicators.

When something changes unexpectedly, someone investigates.

A store manager might handle a staffing problem.

But what happens when the company needs to replace expensive equipment, negotiate a major supplier agreement, or make a significant capital investment?

Those decisions are generally handled by people with greater authority and responsibility.

The manager operates within a framework created by the larger organization.

If you buy one of those locations independently, you become responsible for providing much of that oversight yourself.

And that's where many first-time buyers misunderstand what they're purchasing.

The Difference Between Managing Employees and Managing a Business

Imagine buying a restaurant.

You hire a front-of-house manager to supervise servers, bartenders, and hosts.

You also have a kitchen manager or head chef responsible for food preparation and kitchen operations.

Those people can handle substantial day-to-day responsibilities.

But who negotiates the restaurant's lease?

Who decides whether to expand?

Who evaluates major financing arrangements?

Who determines whether the business can afford to replace expensive kitchen equipment?

Who investigates declining gross margins or evaluates whether the overall business strategy needs to change?

In a small business, those responsibilities often remain with the owner.

Larger companies can employ experienced executives to make these decisions.

A national restaurant chain may have specialized employees responsible for negotiating commercial leases, managing capital investments, and developing operating strategies.

Those employees are highly experienced professionals.

They understand the organization's financial objectives and have demonstrated the judgment necessary to make significant decisions.

But hiring someone with that level of experience can be extremely expensive.

A small restaurant may be able to afford a competent operations manager.

It may not be able to afford an executive capable of replacing the owner's entire leadership role.

That's an important distinction.

Why Buying a Business Doesn't Automatically Make You Qualified to Supervise It

Suppose you've spent your career working in a large corporation.

You're intelligent, successful, and accustomed to managing important responsibilities.

You decide to purchase a small business outside your industry.

You believe you can hire someone with operational experience and let that person manage everything.

But how will you know whether they're performing well?

What information should they report?

Which operating problems require your attention?

How will you recognize whether declining sales are temporary or indicate a more serious problem?

What happens when the manager recommends an expensive investment?

If you don't understand the business, you may struggle to evaluate those decisions.

And you could become entirely dependent on the judgment of someone whose performance you're supposed to supervise.

That's why I encourage prospective buyers to develop operational and management experience before purchasing a company.

You need to understand how businesses function, how employees behave, how financial performance is measured, and how operating decisions affect profitability.

How Owners Successfully Transition to Manager-Led Businesses

I've worked with clients who eventually reached a point where they spent only a few hours each week supervising their businesses.

So it is possible.

But the process they followed is very different from the simplified strategy promoted online.

They didn't simply purchase a business and immediately hire someone to replace themselves.

Instead, they followed a gradual transition.

Step 1: They Purchased the Business and Learned How to Operate It

The buyers initially became directly involved in operations.

They worked with the sellers during the ownership transition.

They learned about customers, employees, suppliers, financial reporting, and the challenges associated with running the company.

They developed practical experience.

This helped them understand which decisions mattered and what normal operating performance looked like.

Step 2: They Built Systems and Standard Operating Procedures

Once they understood the business, they began documenting how it should operate.

They developed standard operating procedures, checklists, reporting requirements, and internal controls.

These systems made the business less dependent on individual employees.

They also created a framework that a future manager could follow.

Step 3: They Identified the Right Performance Indicators

The owners determined which numbers could help them recognize problems before those problems appeared in the financial statements.

For a gas station, those indicators might include daily fuel sales, merchandise revenue, gross margins, customer traffic, and inventory discrepancies.

For another business, the relevant metrics would be different.

The important point is that the owner understood what those numbers meant.

They could recognize when something was outside the normal operating range.

Step 4: They Trained a Manager to Operate Within Those Systems

Only after developing that operational knowledge did they begin stepping away from day-to-day management.

They trained a manager to follow established procedures and report important information.

The owner then shifted from operating the business to supervising the person operating it.

Step 5: They Continued Monitoring the Business

Even after stepping back, the owners remained involved.

They reviewed performance reports.

They investigated unusual results.

They made major decisions and maintained oversight.

They weren't necessarily working full-time in the business anymore.

But they were still responsible for it.

The manager replaced their day-to-day operating role, not their ownership responsibilities.

The Pennsylvania Transmission Shop: An Absentee-Owned Business That Wasn't Truly Passive

Let me share an example I've discussed before.

A transmission repair shop in Pennsylvania was advertised as an absentee-owned business.

The owner lived in Florida.

The business already had a manager working at the shop.

To an inexperienced buyer, this might appear to be an ideal opportunity.

Purchase the business, keep the existing manager, and collect the profits.

But there was an important detail.

The owner had operated the transmission shop for approximately 30 years before moving to Florida.

And even after relocating, that owner remained involved.

They handled payroll remotely.

They monitored the shop through security cameras.

They accessed the point-of-sale system from their computer.

They spoke regularly with the manager.

Most importantly, they had decades of experience that allowed them to recognize operating problems almost immediately.

A short telephone conversation could tell them a great deal about what was happening in the shop.

Why This Matters to a New Buyer

Imagine purchasing that business without any experience in automotive repair.

The seller leaves.

You retain the manager.

But you don't have the seller's 30 years of knowledge.

You may not know which financial indicators matter.

You may struggle to recognize operational problems.

And you may not understand whether the manager's decisions are appropriate.

The business may have been successfully operated by an absentee owner.

But that doesn't mean it can be successfully operated by any absentee owner.

The seller's knowledge was part of what made the arrangement work.

And that knowledge doesn't automatically transfer when the business is sold.

Even Three McDonald's Restaurants Can Require a Full-Time Owner

Another example involves a friend of mine who owns three McDonald's restaurants.

McDonald's is famous for its operating systems.

Its restaurants have established procedures, employee training programs, and highly structured daily operations.

Each of my friend's locations has a manager and an assistant manager.

The restaurants are not dependent on the owner personally preparing food or operating the cash registers.

But here's the surprising part.

My friend still works full-time supervising those three restaurants.

Why?

Because someone needs to oversee financial performance, purchasing, bookkeeping, deposits, operating margins, and management accountability.

The managers handle daily operations.

The owner manages the managers.

And that responsibility takes substantial time.

If three highly systematized franchise locations still require significant owner involvement, imagine the challenges of purchasing an independent business with less developed operating systems.

A franchise system may provide useful support.

It doesn't eliminate the owner's responsibilities.

What Happens When a Manager Quits?

This brings us to another major problem with the idea of absentee ownership.

What happens when the manager leaves?

Many buyers assume they can simply hire a replacement.

But replacing a key manager in a small business can be much more difficult than replacing a manager in a large corporation.

Large organizations have multiple layers of management.

They often have employees who can temporarily assume additional responsibilities.

They may also have formal leadership development and succession programs.

Small businesses rarely have that level of management depth.

When a critical employee leaves, the owner may be the only person capable of stepping in.

A member of my Business Buyer Advantage group coaching program describes this as the bench depth problem.

It's an excellent analogy.

Think about a sports team.

If a key player becomes unavailable, the team needs someone else who can step into that position.

A large organization may have several qualified replacements.

A small business may have none.

And that means the owner becomes the backup.

The Eight-Figure Business Owner Who Had to Return to Work

I recently met a business owner who had built a company generating multiple eight figures in annual revenue.

This was not a tiny owner-operated company.

It had employees, supervisors, managers, and a senior leadership team.

The company had a chief financial officer, a chief operating officer, and executive leadership.

The owner had spent years developing the organization.

Eventually, they created a succession plan that allowed them to step away from the CEO role.

It appeared that they had achieved the goal many buyers dream about.

They owned a substantial business without needing to manage daily operations.

Then two key people left.

The chief operating officer resigned.

And the chief financial officer, who had been considered a potential successor to the COO, also departed.

Suddenly, the company's leadership succession plan had a major gap.

The owner had to return to operations.

Interestingly, they didn't return as CEO.

They stepped into the COO role because they wanted to preserve the leadership structure they had worked so hard to establish.

That meant the owner was now performing an operating role within a company they owned, reporting through a management structure they had created.

What This Example Teaches Us

Even a large, profitable company with an established executive team can experience unexpected leadership problems.

Management succession isn't something you solve once and forget.

It requires continuous attention.

And in smaller businesses, where fewer people are available to assume leadership responsibilities, the risks can be even greater.

If you purchase a business expecting to remain uninvolved, you need to consider what happens when the manager quits, becomes ill, underperforms, or needs to be replaced.

You may suddenly become responsible for running the company yourself.

Why Management Depth Matters More Than Business Size

Some acquisition promoters suggest that the solution is simply to buy a larger business.

The argument is that a bigger company will have more employees, stronger systems, and an established management team.

That can certainly help.

But size alone doesn't guarantee independence from the owner.

The important question is whether the organization has sufficient management depth.

Who can replace the general manager?

Who understands the financial systems?

Who can supervise operations if a key employee leaves?

Who has the authority and experience to make important decisions?

And what happens if several key employees leave within a short period?

These questions matter regardless of whether the company generates $2 million or $20 million in annual revenue.

A business with several managers but no credible succession plan may still depend heavily on its owner.

What Buyers Should Investigate Before Purchasing a Manager-Run Business

If you're considering acquiring a business advertised as absentee-owned, semi-absentee, or manager-operated, you need to investigate the actual responsibilities of the current owner.

Don't rely solely on the listing description.

Ask detailed questions.

AreaQuestions to investigate
Owner involvementHow many hours does the owner actually work each week?
Daily operationsWhich tasks are handled by employees and which remain with the owner?
Financial oversightWho reviews cash flow, margins, payroll, and financial reports?
Major decisionsWho approves financing, capital expenditures, and significant contracts?
Management experienceHow long has the manager worked in the business?
Reporting systemsWhat KPIs and management reports are reviewed regularly?
Succession planningWho could replace the manager if they left tomorrow?
Operating proceduresAre the company's systems documented and consistently followed?
Owner expertiseWhat knowledge does the seller possess that isn't documented?
Financial capacityCan the business afford qualified management after acquisition debt payments?

These questions can reveal whether you're purchasing a genuinely well-managed organization or a company that still depends heavily on the seller.

Can the Business Actually Afford a Manager?

Another important consideration is the financial cost of management.

Suppose you're evaluating a small business that generates $250,000 in seller's discretionary earnings.

That figure may include the financial benefit available to a working owner before considering certain adjustments.

If you plan to hire a manager, you need to account for that person's compensation.

For illustration, imagine the business requires a manager costing $100,000 annually, including payroll-related expenses and benefits.

That could reduce the amount available before acquisition financing from $250,000 to approximately $150,000, assuming the original earnings figure didn't already include that management expense.

Then you still need to consider debt service, capital expenditures, working capital, taxes, and other financial obligations.

A business that provides a comfortable income to an owner-operator may not generate an attractive return for an absentee investor.

That's why you need to understand the difference between the earnings available to a working owner and the cash flow available after paying someone else to perform that work.

Why Operational Experience Is So Important

If you've spent your career in a large corporate organization, you may have developed valuable professional skills.

But corporate experience doesn't always expose you to the full range of challenges associated with operating a small business.

In a large company, specialized departments handle human resources, accounting, purchasing, compliance, technology, legal matters, and other responsibilities.

You may be excellent at your particular job without seeing everything happening behind the scenes.

In a small business, those responsibilities often converge on the owner.

You may need to deal with employees who don't show up for work.

You may need to resolve customer complaints.

You may need to negotiate supplier terms, evaluate equipment purchases, or respond to sudden cash flow problems.

And there may be nobody else available to make those decisions.

That's why I encourage prospective buyers to develop practical management experience.

Take responsibility for a profit-and-loss statement.

Manage employees.

Supervise operations.

Learn how to evaluate business performance.

The more experience you develop before purchasing a company, the better prepared you'll be to recognize the risks associated with ownership.

Talk to Real Business Owners Before You Buy

Here's a practical exercise I recommend to anyone attracted to the idea of purchasing a business and immediately hiring a manager.

Invite three business owners to lunch.

Choose people who actually operate small or medium-sized companies.

Ask them what their typical week looks like.

Ask whether they've ever hired a manager.

Find out which responsibilities they delegated successfully.

And ask what they still needed to handle personally after hiring that manager.

You may be surprised by what you hear.

Many owners have stories about staffing problems, unexpected expenses, difficult customers, equipment failures, and management challenges.

These are the realities of business ownership.

And understanding them before investing hundreds of thousands of dollars can help you make a much more informed decision.

Be Careful With Social Media Business Acquisition Advice

One reason the hire-a-manager strategy remains popular is that it makes business ownership sound easy.

And easy solutions are attractive.

They're especially attractive when presented through highly produced videos featuring confident personalities, impressive claims, and promises of financial independence.

But entertainment isn't the same as education.

A compelling video can make you feel excited about entrepreneurship without teaching you how to evaluate a business or manage its risks.

As I explained:

"It's just a grift." —David C. Barnett

I was referring to the marketing of unrealistic acquisition training that promises inexperienced people they can quickly learn to buy businesses and hand off the work to managers.

The problem isn't that business acquisition training exists.

I provide acquisition training myself.

The problem is presenting business ownership as a simple, low-risk path to wealth without explaining the responsibilities involved.

Small businesses are challenging to operate.

They require judgment, dedication, experience, and sometimes a degree of luck.

Any educational program that ignores those realities is leaving out information prospective buyers need.

Is Absentee Business Ownership Ever Realistic?

Yes, it can be.

But it requires the right combination of circumstances.

The business needs strong systems.

It needs reliable management.

It needs appropriate financial reporting and internal controls.

It needs sufficient profitability to compensate managers while still producing an acceptable return for the owner.

And the owner needs enough knowledge to supervise performance and respond when something goes wrong.

In some cases, a buyer can gradually build those conditions after acquiring and operating a business.

In other cases, an established company may already have much of that structure in place.

But even then, the owner should understand the continuing responsibilities and the possibility of becoming more involved unexpectedly.

The important distinction is between delegating daily operations and eliminating ownership responsibility.

Those are not the same thing.

Final Thoughts: Hiring a Manager Doesn't Make Business Ownership Passive

Buying an established business can be a powerful way to become an entrepreneur.

And hiring capable managers can help owners build companies that operate more efficiently and require less day-to-day involvement.

But the idea that anyone can buy a small business and immediately hand over every responsibility to a manager is dangerously misleading.

A manager can supervise employees.

A manager can follow operating procedures.

A manager can handle many daily decisions.

But someone still needs to supervise the manager, evaluate financial performance, make major strategic decisions, and respond when leadership problems arise.

In a small business, that person is often the owner.

As I explained:

"The ultimate backup to all management and leadership is the owner." —David C. Barnett

If you're considering buying a business, don't assume that an existing manager or franchise system eliminates the need for your own knowledge and involvement.

Investigate the seller's actual responsibilities.

Understand the company's management structure.

Evaluate its financial capacity to support professional management.

And consider what would happen if key employees suddenly left.

Most importantly, develop realistic expectations about what business ownership involves.

As I explained:

"please, please, please don't let anyone convince you that anything about small business is simple or easy." —David C. Barnett

You can delegate tasks. You can delegate authority. But you cannot completely delegate the risks of owning a business.

That's the reality every prospective buyer needs to understand before making an acquisition.

Learn How to Buy and Manage a Small Business the Right Way

If you're considering buying an existing business, my Business Buyer Advantage program teaches you how to evaluate acquisition opportunities, analyze financial performance, understand management risks, and structure transactions with appropriate protections.

The goal isn't simply to help you complete a deal. It's to help you understand whether the business makes sense for your experience, financial circumstances, and long-term objectives.

Explore Business Buyer Advantage

If you want to understand how management compensation, acquisition financing, and operating expenses affect the cash flow of a business, my Cash Flow Forecasting and Business Plan Writing Program can help you develop a realistic financial model.

Explore Business Plan School

👉 Want deeper dives like this? Join my email list at DavidCBarnettList.com for early access to videos, insights, and 7 free bonus gifts.

Saturday, June 13, 2026

Why Banks Love Seller Financing in Business Acquisitions

Many buyers see seller financing as a way to bridge a funding gap. But what many people don't realize is that banks often value seller financing just as much as buyers do.

In fact, a seller note can significantly improve a lender’s confidence in a business acquisition.



Seller Financing Reduces Risk for Banks

When a seller agrees to finance part of the purchase price, they remain financially invested in the success of the business.

From a bank's perspective, this creates an important layer of protection.

The seller:

  • Knows the business better than anyone

  • Has confidence in its future performance

  • Has a financial incentive to help the buyer succeed

That alignment reduces risk for everyone involved.


Why Banks Sometimes Delay Seller Note Payments

In some transactions, banks require seller note payments to be postponed for a period of time.

Why?

Because every dollar that stays in the business improves cash flow and increases the chances that the bank loan will be repaid.

The lender wants to see:

  • Stable operations

  • Consistent cash flow

  • A successful transition to new ownership

Before additional money starts flowing to the seller.


Sellers Become a Safety Net

Banks also recognize that sellers have a unique advantage: they understand the business.

If a buyer struggles after closing, the seller may be in the best position to:

  • Offer guidance

  • Assist with operations

  • Step back into the business if necessary

This ongoing involvement can help protect the lender’s investment.


Government-Backed Loans Change the Equation

In markets with government-guaranteed lending programs, banks often take a different approach.

Because part of the risk is transferred to the government, lenders may place less emphasis on large seller notes.

This can lead to:

  • Easier access to financing

  • Smaller seller financing requirements

  • Higher business valuations

While helpful for sellers, it can sometimes increase risk for buyers.


Why Buyers Should Still Want Seller Financing

Even when bank financing is available, buyers benefit from having a meaningful seller note in the deal.

A substantial seller note:

  • Aligns interests

  • Encourages transparency

  • Creates accountability

  • Provides additional protection if issues arise after closing

For many experienced buyers, seller financing remains one of the most important risk-management tools available.


If you want to learn more about creative private investments, check out my book Invest Local — available on Amazon or as a PDF from DCBBooklist.com


Key Takeaways

Banks value seller financing because it reduces risk and keeps sellers invested in the future success of the business. A meaningful seller note aligns incentives, supports smoother transitions, and adds an extra layer of protection for both lenders and buyers.


👉 Want deeper dives like this? Join my email list at DavidCBarnettList.com for early access to videos, insights, and 7 free bonus gifts.


Monday, June 8, 2026

The Most Expensive Mistake Business Buyers Make

 


**New Video Alert!

Many people think they understand business cash flow.

Then they buy a business and discover they forgot one critical expense.

Depreciation.

In this video, I explain why depreciation and capital expenditures are some of the most important concepts in business acquisition, and why ignoring them can lead to disappointing returns and expensive surprises.

Watch the video here: https://youtu.be/x9qkUhcqzmo 

Cheers

See you over on YouTube


David C Barnett



Saturday, June 6, 2026

Royalty Financing in Business Acquisitions: A Creative Alternative to Traditional Deal Structures

 

When buyers and sellers disagree on what a business is worth, traditional financing structures don’t always work.

That’s where royalty financing can become a powerful solution.

Rather than agreeing on a fixed purchase price, royalty financing allows part of the seller’s compensation to be tied directly to the future performance of the business.



What Is Royalty Financing?

Royalty financing is an arrangement where the seller receives ongoing payments based on future business results.

These payments are often tied to:

  • Revenue

  • Units sold

  • Growth targets

  • Other performance metrics

Instead of paying everything upfront, the buyer shares a portion of future success with the seller.

Why Buyers and Sellers Use Royalties

Royalty structures are most useful when there is uncertainty about future performance.

For example:

  • The seller believes the business is positioned for rapid growth.

  • The buyer believes that growth is unproven.

Rather than arguing over valuation, both parties can let future results determine part of the final payout.

How Royalty Deals Work in Practice

A common structure involves:

  • An upfront payment for tangible assets and current value

  • Additional royalty payments if performance targets are achieved

This allows the buyer to avoid overpaying today while giving the seller an opportunity to benefit if their predictions prove accurate.

The result is often a more balanced and flexible transaction.

The Benefits of Royalty Financing

For buyers:

  • Reduces upfront risk

  • Aligns payments with actual performance

  • Helps bridge valuation gaps

For sellers:

  • Creates upside potential

  • Rewards future growth

  • Keeps them invested in the business’s success

Both sides gain a mechanism for sharing risk.

Potential Challenges

Royalty financing isn't suitable for every deal.

Some lenders may be reluctant to finance transactions with variable payment structures because future obligations are harder to model and predict.

As a result, royalty agreements are often used in privately financed transactions or alongside alternative deal structures.

If you want to learn more about creative private investments, check out my book Invest Local — available on Amazon or as a PDF from DCBBooklist.com

Key Takeaways

Royalty financing can help buyers and sellers overcome valuation disagreements by tying part of the purchase price to future performance. When structured properly, it aligns incentives and creates a fairer way to share both risk and reward.

👉 Want deeper dives like this? Join my email list at DavidCBarnettList.com for early access to videos, insights, and 7 free bonus gifts.


Friday, June 5, 2026

A interesting interview with the host of ValuationPodcast.com - A podcast about all things Business + Valuation Melissa Gragg

 


In today’s episode, I’m joined by David C. Barnett—an international speaker, author, consultant, and one of the most respected voices in the world of buying, selling, financing, and managing small and medium-sized businesses.

Together, we take a deep dive into what really happens in the lower middle market and Main Street business transactions. Most owners hear headlines about billion-dollar acquisitions, but the reality for the majority of business owners is very different. We break down how buyers actually think about value, why sellers often misjudge what their business is worth, and how emotional expectations, financing realities, and risk perception all collide during a deal.

We also explore why many businesses never sell, what drives real valuation multiples in this space, and how sellers can better prepare themselves for a successful and realistic exit. This conversation is a grounded, eye-opening look at the “real deal” behind business valuation and M&A.

Thursday, June 4, 2026

Live Government Contracts for Small Business: What Most Owners Miss with Melinda Colon



Can government contracts help you grow your business and increase its value? I’m happy to have Melinda join me on a live broadcast. Melinda helps business owners use government contracting as a strategic growth tool. Rather than chasing random opportunities, she helps companies identify the right contracts, build sustainable sales pipelines, and create long-term value. Tune in as we discuss how government procurement really works, the biggest mistakes business owners make when pursuing contracts, and why winning one contract should never be the goal. We’ll also explore how business buyers and owners can use government contracting to diversify revenue, reduce risk, and build a stronger, more valuable company. This is a ‘must see event’ for anyone interested in business growth, acquisitions, sales strategy, or government contracting. Find Melinda on Linkedin here: https://www.linkedin.com/in/melinda-colon/ https://melindacolon.com/


Monday, June 1, 2026

Is Intellectual Property Still Valuable? (What Business Buyers Need to Know)

 

How AI Is Changing the Value of Intellectual Property When Buying a Business

For years, business owners have argued that their companies are valuable because of the information, intellectual property, proprietary systems, and specialized knowledge they've developed.

And in some cases, that's absolutely true.

But something important is changing.

Information that once took years to collect, organize, and develop can sometimes be recreated in hours using modern technology and artificial intelligence.

That has major implications for anyone buying, selling, or valuing a small business.

If you're considering purchasing a company that claims much of its value comes from a proprietary curriculum, training program, operating manual, database, or collection of specialized information, you need to ask a very important question.

Are you buying something genuinely difficult to recreate, or are you paying for information that is no longer scarce?

I've spent years helping people understand the value of small businesses and the risks associated with acquisitions.

Today, I want to explain how the changing availability of information affects business valuation, why execution matters more than ever, and how to determine whether acquiring a business makes more sense than starting a competing company yourself.


When Information Was Scarce, It Could Be Extremely Valuable

There was a time when specialized information was genuinely difficult to obtain.

In fact, I still have books on my bookshelf that were never distributed through major publishers.

Some were simply photocopied at a local print shop, coil-bound, and sold through the mail.

If you wanted one, you had to discover that it existed, find out where to send a cheque, and wait for it to arrive.

Before information became widely available online, people often discovered specialized publications through advertisements in newsletters, magazines, or industry publications.

And sometimes the only way to learn certain techniques was to attend a conference or meet someone who already had the knowledge.

Some of those materials helped shape the understanding I later used when writing my book Invest Local, including concepts related to calculating returns on secondary-market note transactions.

The information was difficult to find.

That scarcity created value.

If a business had developed specialized knowledge that competitors couldn't easily access, that information could represent a meaningful competitive advantage.

But the economics of information have changed dramatically.

The Internet Reduced Information Scarcity. AI Is Accelerating the Change.

The internet was the first major disruption.

Suddenly, information that previously required weeks of searching could be discovered in minutes.

People gained access to instructional videos, templates, online communities, examples, research, and specialized explanations.

Knowledge became easier to locate and distribute.

Now artificial intelligence is accelerating that process.

You can ask an AI system to draft a lesson plan, organize a training program, create worksheets, develop project ideas, or outline an operating procedure.

You may still need an experienced person to review, test, and improve the output.

But the time and cost required to assemble the initial material can be dramatically lower.

This doesn't mean that all intellectual property is worthless.

It means that buyers must become much more careful about identifying which information still creates a meaningful competitive advantage.

Something that was difficult to reproduce twenty years ago might be relatively easy to recreate today.

And that changes what a rational buyer should be willing to pay for it.

The Children's Coding Camp Example: Is the Curriculum Really the Asset?

Imagine a business that operates summer coding camps for children.

Twenty years ago, developing a strong curriculum might have required an enormous amount of work.

The owner would need to determine which programming concepts children could understand, create age-appropriate lessons, develop engaging projects, prepare worksheets, and build instructor guides.

They would also need to test the material and determine what actually worked in a classroom.

That effort could create a valuable educational asset.

A buyer might reasonably view the curriculum as a significant part of what they were acquiring.

But consider the same business today.

An AI tool can help generate lesson plans, coding exercises, worksheets, and project ideas relatively quickly.

An experienced educator or programming instructor could then review the material and make necessary improvements.

The result might not immediately match a mature, thoroughly tested curriculum.

But the cost of producing a credible alternative could be much lower than it once was.

So if the seller claims that the curriculum represents a large portion of the company's value, you need to investigate that claim.

How difficult would it actually be to recreate the material?

How much would it cost?

How long would it take?

And would the new material be good enough to compete?

Those questions are now essential to evaluating information-based businesses.

The Difference Between Information and Execution

This brings us to one of the most important distinctions in business valuation.

Having information is not the same as having a functioning business.

I've met many people who believe they have a million-dollar business idea.

Sometimes they don't even want to explain the idea because they're afraid someone will steal it.

But ideas alone rarely create substantial business value.

What matters is whether you can execute the idea successfully.

That means finding customers, delivering products or services, managing employees, controlling expenses, and generating profits.

And ideally, the business should be able to do those things consistently without depending entirely on one person.

As I explained:

"execution is the hard part." —David C. Barnett

A curriculum is information.

A profitable coding camp is an operating business.

And the distinction between those two things can be enormous.

What Actually Makes a Coding Camp Business Valuable?

Let's return to the children's coding camp.

Suppose the business has been operating successfully for twenty years.

It has an established reputation in the community.

Parents recognize the brand.

Schools and community organizations refer families to the program.

The company has relationships with instructors and a reliable process for recruiting and training them.

It also has a registration system, a marketing process, and procedures for handling cancellations, refunds, behavioural issues, food allergies, and staffing problems.

These things matter.

The company knows how to attract customers and deliver a successful experience.

It has developed relationships that would take time to recreate.

And it has operational systems that have been tested in the real world.

Now imagine the seller argues that the company's main asset is its coding curriculum.

That may completely misunderstand where the real value resides.

The curriculum might be relatively easy to reproduce.

But the customer relationships, reputation, operating systems, and established distribution channels could be much more difficult to replicate.

The Real Question Buyers Should Ask

When evaluating this kind of company, ask yourself:

Is the value in the content, or is the value in the machine that delivers the content?

That question can help you distinguish between information that is easily copied and a business that has developed a meaningful competitive advantage.

Why Proprietary Information Doesn't Automatically Justify a Higher Purchase Price

Business sellers sometimes describe their assets using terms such as proprietary methods, unique systems, specialized training, exclusive knowledge, or intellectual property.

Those descriptions can sound impressive.

But they aren't substitutes for financial analysis.

A buyer needs to investigate whether the claimed intellectual property actually provides an advantage.

For example, could a competent person recreate most of the material using readily available tools?

Does the business have legal protections, such as enforceable intellectual property rights, that meaningfully restrict competitors?

Does the information produce measurable customer benefits?

And is the advantage durable?

These are different questions from simply asking how much the seller spent developing the material.

Historical development costs don't necessarily determine present economic value.

A seller may have invested thousands of hours creating a training program.

But if a competitor can now produce a comparable alternative for a fraction of the cost, that changes the economic value of the original material.

The effort involved in creating an asset isn't the same as the benefit it provides to a buyer today.

When Intellectual Property Claims Become Especially Dangerous

The risk becomes particularly significant when a business isn't generating strong cash flow.

Imagine a company that has stopped operating because the owner became ill.

Perhaps it has valuable-looking manuals, training materials, course content, or a proprietary operating system.

The seller argues that these assets justify a substantial purchase price.

But the company has no current earnings.

There may be no active customers.

And its operational capabilities may have deteriorated.

In that situation, the buyer needs to be especially careful.

The Backhoe and Dump Truck Comparison

Years ago, I used an example involving a foundation contractor.

Imagine purchasing a backhoe and a dump truck.

You now have some of the equipment necessary to operate a foundation business.

But you don't have customers, revenue, or earnings.

You essentially have a pre-revenue foundation company.

The equipment has value because it could be sold or used.

But you shouldn't automatically value the operation as though it were a profitable going concern.

The same principle applies to information-based businesses.

Owning a collection of training materials doesn't automatically mean you own a functioning, profitable training company.

You need to distinguish between the value of individual assets and the value of an operating business.

Why Existing Customers May Be Worth More Than the Information

One of the most important advantages of acquiring an established business is access to an existing customer base.

Suppose the coding camp has operated in the same community for twenty years.

It has developed a mailing list of parents who have enrolled their children in previous programs.

Each year, the company can contact those families and encourage them to register again.

It may also receive referrals from satisfied customers.

That customer access can be valuable.

A startup would need to build those relationships from scratch.

But even this asset requires careful investigation.

Customer Lists Can Lose Value Over Time

Imagine the coding camp stopped operating for two summers.

The owner became ill and couldn't run the program.

The mailing list still exists.

But some of the children represented by that list may now be too old to attend.

Other families may have moved away or developed relationships with competing programs.

And because the business wasn't operating, it may have missed opportunities to attract new families.

The customer database could be significantly less useful than it was before operations stopped.

So buyers need to examine not only whether customer information exists but also whether that information remains commercially valuable.

A database isn't automatically a customer relationship.

And a historical customer relationship isn't automatically future revenue.

The Assets That May Still Justify Buying an Existing Business

When evaluating a company whose value supposedly depends on information or intellectual property, I encourage buyers to look for assets that are genuinely difficult to recreate.

These can include:

  • Existing customers: Relationships that would require significant time and marketing investment to develop independently.

  • Demonstrated cash flow: Historical evidence that the business can generate profits.

  • Brand recognition: A reputation that influences customer purchasing decisions.

  • Trained employees: People who understand the company's operations and can deliver its products or services.

  • Established locations: Premises that provide a meaningful operational or competitive advantage.

  • Licences and approvals: Permissions or regulatory authorizations that may be difficult to obtain.

  • Vendor relationships: Supplier arrangements that provide favorable pricing, access, or reliability.

  • Proven sales channels: Marketing and distribution systems that consistently generate customers.

  • Operational systems: Documented processes that employees actually use to produce results.

  • Transferable know-how: Specialized knowledge that can realistically be transferred to a new owner.

These assets can create value because they provide advantages that a new competitor may struggle to reproduce.

The key is determining which advantages actually exist and how much they're worth.

The Importance of Location and Community Relationships

Let's revisit the coding camp example one more time.

Imagine the company operates in a church hall directly across the street from an elementary school.

Parents can easily arrange for their children to attend after-school programs.

The location is affordable.

The organization has a long-standing relationship with the facility.

And there may be very few comparable spaces available nearby.

That location could be a significant advantage.

A competing startup might be able to develop a similar curriculum in a matter of days or weeks.

But securing a similarly convenient facility at a reasonable cost could be much more difficult.

That's an example of an asset that may create genuine economic value.

Of course, the buyer would still need to verify whether the location agreement can continue after the acquisition.

But the principle remains.

Sometimes the value of a business lies in practical advantages that have little to do with its intellectual property.

Buying a Business Versus Starting a Competitor

This leads to a comparison I believe every business buyer should consider.

Would it make more sense to buy the existing business or start a competing company?

I discuss this in my 2014 book Buying Versus Starting a Small Business.

A business acquisition can provide substantial advantages.

You may receive existing customers, trained employees, operating systems, established supplier relationships, and proven cash flow.

Building those advantages independently could take years.

And a startup might experience significant losses before reaching profitability.

In those circumstances, buying the existing business may be the better decision.

But what happens when the seller wants a very high price for a company whose main asset is easily recreated information?

The comparison changes.

If you can create a comparable product, develop the necessary systems, and enter the market for substantially less money, starting a competing business may be more attractive.

Compare the Real Cost of Both Options

When evaluating the alternatives, consider:

Acquisition considerationStartup consideration
Purchase price and transaction expensesStartup investment and development costs
Existing cash flowExpected losses before profitability
Established customersCost and time required to attract customers
Existing employees and systemsRecruiting and system-development expenses
Acquisition financing and debt serviceStartup financing and capital requirements
Existing reputation and market positionTime required to establish credibility
Inherited liabilities and operating problemsRisks of launching an unproven business

The right answer depends on the specific circumstances.

Sometimes the established business provides advantages that would be extremely expensive to recreate.

Other times, the seller's asking price is so high that a startup becomes a more reasonable alternative.

Even if you ultimately decide to buy the company, understanding the startup alternative can help establish a sensible maximum purchase price.

Why AI May Change the Value of Some Franchise Systems

This issue also applies to franchises.

A franchise can provide valuable advantages.

These may include brand recognition, established customer demand, supplier relationships, operating systems, and ongoing support.

But not every franchise offers the same benefits.

Suppose a franchise primarily provides an operating manual, a logo, and some basic training.

If the underlying business concept and procedures can be recreated relatively easily, you need to ask what justifies the franchise fees and ongoing royalties.

The existence of a manual doesn't necessarily create a durable competitive advantage.

The Plant-Based Restaurant Example

I've spoken with people interested in restaurant franchises built around specialized food concepts, including plant-based dining.

The argument is sometimes that demand for vegetarian food will continue increasing.

That may be true.

But consider what happens if vegetarian dining becomes much more popular.

Existing restaurants can add vegetarian options to their menus.

They don't necessarily need to adopt an entirely new franchise concept.

In fact, many restaurants already offer menu items designed for vegetarian customers.

So the question isn't simply whether the market for vegetarian food will grow.

It's whether the franchise possesses advantages that competitors cannot easily reproduce.

Does it have a powerful brand?

Does it have superior operations?

Does it offer meaningful purchasing advantages?

Does it attract customers more efficiently?

Those are the questions that matter.

A Franchise Manual Isn't the Same as a Competitive Advantage

Some food suppliers already provide restaurants with operating guides, business plans, recipes, and other support materials.

If you want to open a particular style of restaurant, you may be able to obtain much of the basic information from suppliers and other accessible sources.

AI may make developing those materials even easier.

That doesn't mean a franchise has no value.

It means buyers need to separate the easily reproduced information from the assets that genuinely improve the economics of operating the business.

A strong franchise may provide customer recognition, proven systems, purchasing power, and ongoing operational support.

A weak franchise may provide little more than information that is already widely available.

Those two propositions shouldn't be valued the same way.

What About Businesses Built Around Personal Expertise?

There's another important complication.

Some businesses derive much of their value from the knowledge and experience of a particular individual.

My own consulting business is an example.

I provide educational materials about buying, selling, financing, and managing small businesses.

I also work directly with clients who need help evaluating real transactions.

Someone could purchase the rights to my Business Buyer Advantage training materials.

But owning those materials wouldn't automatically give them the ability to deliver the same consulting services.

My consulting work draws on years of experience dealing with business owners, buyers, sellers, lenders, and transaction problems.

That expertise is difficult to transfer.

As I explained:

"Really, the true IP in my business is in here." —David C. Barnett

I was referring to the knowledge and experience I've developed personally.

A buyer acquiring an expertise-driven business needs to understand how much of that value depends on the seller remaining involved.

If the seller leaves, can the business continue delivering the same results?

Or does the company's value depend on knowledge that isn't easily transferred?

This is a critical consideration when evaluating consulting firms, professional services businesses, and other knowledge-intensive companies.

Why Training and Experience Still Matter in the Age of AI

AI can help people access and organize information.

But it doesn't automatically give them practical judgment or experience.

There's a difference between reading about business acquisitions and knowing how to evaluate a real transaction.

For example, someone who completes my Business Buyer Advantage training becomes familiar with concepts such as cash flow, goodwill, valuation, due diligence, and deal structure.

When that person later books a consulting session with me, we can often move through their questions much more efficiently.

They already understand the terminology and fundamental concepts.

We can spend our time examining the specific issues affecting their transaction.

Without that foundation, I may need to spend substantial time explaining the basics before we can investigate the actual problem.

That's one reason structured education and experienced guidance can still create value.

The value isn't necessarily in exclusive access to information.

It can be in how effectively that information is organized, taught, understood, and applied.

How Buyers Should Evaluate Intellectual Property in Due Diligence

If you're considering purchasing a business with significant information-based assets, I recommend investigating several areas.

Due diligence areaKey question
ReproducibilityHow easily could a competent competitor recreate the information?
Development costWhat would it cost to produce a comparable alternative today?
Legal protectionWhat rights does the business actually own or control?
Customer relationshipsDoes the business have active customers who are likely to remain?
Revenue and profitabilityDoes the information contribute to demonstrated earnings?
Operational systemsCan the business consistently deliver its product or service?
Employee capabilitiesDoes the team have the expertise needed to operate independently?
Seller dependenceHow much important knowledge exists only in the owner's head?
Competitive advantageWhat prevents competitors from offering a similar product?
Startup alternativeCould you build a comparable business for less than the acquisition price?

The objective isn't to dismiss intellectual property.

It's to understand its actual economic contribution.

Some intellectual property remains extremely valuable because it is protected, difficult to reproduce, commercially useful, or integrated into a successful operating system.

Other information may have lost much of its scarcity value.

Buyers need to distinguish between the two.

The Changing Value of Information Should Affect Your Acquisition Strategy

The availability of AI-generated information creates both opportunities and risks.

For buyers, it may reduce the cost of starting certain types of businesses.

It can make it easier to develop training materials, organize procedures, create content, and build initial operating systems.

But it can also reduce the competitive advantage of businesses that previously relied on information scarcity.

That means buyers should be especially skeptical when sellers emphasize the historical effort involved in developing proprietary materials.

The important question is what advantage those materials provide today.

As I explained:

"the value in any business acquisition is on what advantage it gives the buyer today." —David C. Barnett

That principle applies whether you're evaluating a training company, consulting practice, franchise, educational business, or another information-based enterprise.

You're not purchasing the seller's past effort.

You're purchasing the future economic benefits of owning the business.

And those benefits must be evaluated in today's competitive environment.

Final Thoughts: Buy the Business, Not Just the Information

Information has become easier to find, assemble, and reproduce.

And artificial intelligence is accelerating that trend.

But successful businesses still require much more than information.

They need customers.

They need capable employees.

They need reliable systems.

They need strong relationships, effective marketing, and the ability to deliver products or services profitably.

Those things can be much harder to recreate than a collection of manuals, lesson plans, or training materials.

That's why I encourage buyers to focus on the operational advantages a business provides.

Does the company have a loyal customer base?

Does it generate transferable cash flow?

Does it have systems that work?

Does it possess relationships, locations, or capabilities that would take significant time and money to reproduce?

And can the business continue delivering those benefits after the seller leaves?

As I explained:

"Are you buying a machine that produces results? Or are you just buying something that can be easily recreated?" —David C. Barnett

That's the distinction.

The value of a business isn't determined by how difficult its information was to create in the past. It's determined by the competitive and economic advantages that business provides today.

Before paying a premium for intellectual property, make sure you understand what you're actually acquiring.

And always compare the acquisition opportunity with the cost and risk of building a competing business yourself.

Sometimes buying is the better option.

Sometimes starting from scratch makes more sense.

The important thing is making that decision based on real economic value rather than outdated assumptions about information scarcity.

Learn How to Evaluate Business Value Before You Buy

If you're considering buying an existing business, my Business Buyer Advantage program teaches you how to analyze cash flow, evaluate goodwill, understand business valuation, conduct due diligence, and identify acquisition risks.

The goal is to help you understand what you're actually buying and whether the proposed transaction makes financial sense.

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If you want to understand how business value is affected by assets, earnings, goodwill, and other factors, explore my book Business and Asset Values: How Owners, Buyers, Sellers, Lenders, and Advisors Should Think About Small Business & Equipment Value.

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If you're comparing buying an existing business with launching a startup, my Cash Flow Forecasting and Business Plan Writing Program can help you model the financial implications of both approaches.

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