I am committed and focused on buying a small business that is complementary to my existing business, ProjectionHub, but given that this does limit my opportunities pretty significantly, I did want to spend a little bit of time thinking about what type of business I would buy if I expanded my search.
As a starting point, I used a dashboard tool that we built which analyzed the SBA loan default data from loans that were closed between 1991 and 2023. The dashboard then allowed me to look at SBA loans categorized as “change of ownership” loans which means the loan was used for a business acquisition.
The SBA only started tracking whether a loan was used for an acquisition about 6 years ago, so this is definitely newer data + some of these new acquisition loans just haven’t had the chance to default yet, but they may still default in the future. So with all of those caveats in mind, here is what I found.
To start with, here are some industries I want to avoid which include a number of food related businesses:
Here is a list of industries that had the lowest default rates (actually 0% default for the loans that are categorized as acquisition loans during the last 6 years).
You will notice that many of these businesses are medical-related, so I would rule them out for my search. I enjoy gardening as a hobby, but don’t think I have what it takes to be a farmer, I have to have my father in law replace my outlets and ceiling fans, so probably not an electrical contractor. I am allergic to cats and dogs, so take the Vet clinic off the list haha!
That leaves Car Washes, Gas Stations and Self Storage.
All 3 of these options do have the potential to be mostly passive for me which does make them interesting, but when I think about the potential upside of owning a gas station vs. the potential downside, and then if I compare that to simply investing in the S&P 500 I can’t imagine that I would buy any one of these 3 types of businesses.
I thought this was a helpful exercise for me to go through and just confirm that if I am going to buy a business it should be complementary to what I am already doing, that is where there is opportunity to have outsized returns. Buying a car wash or self storage facility seems like it has plenty of opportunity for me to screw it up because I don’t know the industry well, or there could be a problem with the specific business that I buy; whereas, buying the S&P 500 probably gives me a slightly lower rate of return, but much less risk and headache.
If you want to play around with the SBA default data tool, as an SMBuyer subscriber, you can check it out for free here.
Until next week,
Adam
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Follow Adam's acquisition journey and learn how to buy a business the smbuyer way.
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