OK let’s review what I preach. I preach buying companies that are bigger than mom and pop hot dog stands. Bigger than storefronts. Bigger than clothing stores. Bigger than your garden variety True Value hardware store. Even if you are only one person I preach this. Why? Because you need to be able to take your hands off the business and a very small business will not let you do this.
So let’s take an example of a True Value Hardware store. These can come in different sizes, anywhere from $1.0 Million to $5.0 Million in sales (the largest usually includes a lumber yard). Maybe they throw off 10% earnings like about $500,000. Let’s compare a construction company of the same size. What are the differences between the two? The differences are actually quite huge. The two glaring ones are 1) the hardware store is local and the contractor can sell anywhere and 2) the contractor does not carry inventory. These two features alone are enough to steer a buyer towards a construction company. Need an example? What happens if home depot moves right next to you hardware store? Case closed. Or what happens if you happen to be in an (ahem) recession and you can’t move your inventory? You may just have $500,000 in junk on your shelves that can’t be sold until two general elections from now.
The beauty of acquiring a construction company is that in the bad times you can operate it out of your garage with one or two people. In good times it can be scaled up to 100 employees. And guess what no big investment in inventory. Now that is the way to run a business.
