I was listening to an interview today with a broker in Florida and it raised an important issue having to do with my last post. Turnarounds aren’t all bad. I should note that in my world turnarounds have a different definition than they do to main street brokers. Most of the turnarounds I have seen are fairly sizable companies that have heavy infrastructure and high overhead. Indeed they may often exceed $10 Million in sales. They also are more vulnerable to the “downward spiral”. Meaning they can’t recover because they have too much fixed overhead, debt or other expenses that can’t be downsized fast enough. And sales can’t be pumped fast enough to help.

However, in the small markets, those businesses below $5.0 Million in sales, the dynamics are different. In most of those cases the businesses can be saved for a variety of reasons. There may be very little fixed overhead. There may be small rent, zero mortgage or very little real estate. It may have a very flexible staff which can be managed to a small size. It may be able to downsize inventory and capital equipment needs. In short, many small companies can run out of their garage at very little cost and survive indefinitely. Not so with the bigger ones.

Thus it may well be advantageous for the small buyer to acquire a small turnaround. These are usually companies with modest expenses but lagging sales. Lagging sales is a common theme in all small businesses but the key is marketability. If the business will respond to improvements in marketing then sales can be scaled. For example a home improvement contractor can advertise for customers whereas a gas station would generally find advertising fruitless.

Now where is this headed? It all gets back to the buyer and his capabilities. I teach how to buy businesses where the buyer can be hands off. However, there is nothing wrong with sweat equity and buyers of small companies can add value according to their skills. A small lagging company can be readily fixed by a buyer willing to put in the effort. The big turnaround usually needs more than just a capable buyer. Thus the small buyer can put small turnarounds on his radar. However, I would point out that the buyer needs to understand where he can help. Anyone with business sense can cut expenses but not everyone knows how to drive sales. And usually that is where the push is needed.