“Walker, how do I do what you’re doing? How do I own a portfolio of businesses like you?” 

I’ll never forget when I was asked this by one of the students after guest lecturing at the Olin Business School years ago.

Before I could respond, the professor, who ran the entire entrepreneurship department and was a successful entrepreneur himself, jumped in. He remarked, “Isn’t it amazing how everyone just wants to skip to where we are?” 

This was a profound response. People often want to achieve great success without understanding the incremental steps required to get there.

Now, I don’t blame the student. I’ve been him myself. In fact, because the SBA allowed buyers to put only 10-20% down, the lending environment has been encouraging for many buyers. Realizing they can secure millions in SBA lending, buyers are often tempted to “go big or go home,” or in other words, buy the largest business (or as many businesses) possible. 

I get it. Life is ultimately about growth and becoming the best version of yourself. We do this by striving for big, hairy, audacious goals. We know we need to make a change to attract the level of success that we desire, but it’s hard to calibrate our ambition when we don’t understand the landscape. 

Should you aim for level one or level ten? Specific to business buying, should you buy one business or multiple when just starting out? 

This is what I want to talk about today. Although I recognize and appreciate your enthusiasm as a first-time buyer, I want to share a dose of reality before you make a decision that leaves you in over your head – so you can ultimately stay in the game and be successful in the long run. 

 

The Right Level of Ambition

 

First, let’s talk about why it’s important to set the right level of ambition. When it comes to ambition, we look at the Mark Zuckerbergs of the world and the fact that our parents told us we could be anything we wanted to be, and we think: we can do whatever we set our minds to.

If some ambition is great, more must be better, right? 

When it comes to ambition, that doesn’t work out very well. Turns out, you can aim too high and face unrealistic challenges, and you can also set the bar too low and sell yourself short. When it comes to ambition, you want to find a balance, where you are able to stretch your capabilities without being overwhelmed. 

Source: LinkedIn |  Consistency vs Intensity: Which One Should You Choose for Long Term Career Growth?

The key to success is finding an endeavor where you can practice consistency, not intensity. By making multiple acquisitions at one time, particularly when you’ve never made an acquisition to begin with, you’re showing up with a level of intensity that’s hard to sustain. 

 

Frameworks for Setting Goals

 

When people ask me whether they should start small or aim for the biggest acquisition they can manage, I always suggest reverse-engineering the steps based on their experience and comfort level. 

Let me explain with two frameworks: James Clear’s Goldilocks rule and Michael Hyatt’s SMARTER goals. 

 

James Clear – The Goldilocks Rule

 

We’re all familiar with the fairy tale of Goldilocks and the Three Bears where Goldilocks finds the porridge that’s not too hot, not too cold, but just right. James Clear uses this analogy in his book Atomic Habits: An Easy & Proven Way to Build Good Habits & Break Bad Ones to describe under what circumstances we experience the perfect amount of motivation.

“The Goldilocks Rule states that humans experience peak motivation when working on tasks that are right on the edge of their current abilities. Not too hard. Not too easy. Just right.”

Not only does the right level of difficulty allow someone to be properly motivated, but it also becomes a source of happiness. When someone is operating at their peak performance and loses time doing something they enjoy, this is referred to as flow, or what athletes and performers describe as being “in the zone.” 

When a goal is too easy, we run the risk of becoming bored. When it’s too difficult, we run the risk of failure. There’s a narrow zone somewhere between boredom and failure that is the perfect difficulty level for you. 

As a buyer, if you’ve never owned or managed a business before, taking on a portfolio of businesses without this experience is like deciding to climb Everest with zero hiking experience. It’s an incredibly massive goal, and one that will set you up for failure.

Believe me when I say that as a first-time buyer, buying and running one business is going to be sufficient challenge for you and also allow you to find your flow. 

 

Michael Hyatt – SMARTER Goals

 

Created by Michael Hyatt, this iteration of the SMART goals framework switches ‘realistic’ in the SMART goals to ‘risky’ in the SMARTER goals. 

Source: Fullfocus.co

By shifting from ‘realistic’ to ‘risky’ goals, entrepreneurs should be encouraged to extend slightly beyond their comfort zones instead of merely going after what’s realistic. As James Clear alluded to, some of the most rewarding and engaging goals are ones where you’re not quite sure you’re going to achieve them or not. 

Hyatt writes in a blog post, “Risky goals are better than playing it safe. I challenge you as you write your goals for this next year, to make them ones that will stretch and challenge you. If you set goals that you know you can achieve you aren’t forcing yourself to rise to the challenge.”

Within the context of buying a business, acquiring a portfolio of businesses with no entrepreneurship experience is more than just risky – it’s unwise. However, I challenge first-time buyers to seek out a business that’s larger over one that’s smaller, largely for the cash flow position of these businesses but also because it’s the right degree of risk for most buyers.

 

The Allure of Replacing Yourself

 

A lot of first-time buyers hope that acquiring a business means acquiring a passive income asset, where they can replace themselves with an operator on day one. Although this can certainly happen, I don’t recommend doing it immediately. There’s a problem that occurs when you delegate too much, too soon. 

As explained in the Harvard Business Review:

“Everyone knows leaders should delegate to ensure that they are working on the right projects and deliverables.  But if you find yourself frequently miscommunicating with your team on deliverables, hearing about issues at the last minute, and misunderstanding how your team set their priorities, it may be a sign you’ve delegated too much, leaving their employees to feel abandoned and unmotivated. At that point, it’s important to take back responsibility for certain tasks to ensure you’re providing your team the guidance and structure they need.”

If you’re going to be an entrepreneur, you need to run a business. That said, there is a right way to delegate.

My friend Dan Martell wrote a book called Buy Back Your Time: Get Unstuck, Reclaim Your Freedom, and Build Your Empire, and in it, he explains how to replace yourself with an operator through the Replacement Ladder:

This is the order in which you should hire employees: 

Admin → Delivery → Marketing → Sales → Leadership

When buyers tell me they want to buy companies then replace themselves with operators from day one, they’re essentially telling me they want to jump to the top of the replacement ladder. 

For the sake of your business and developing your work experience, start small(er). Buy one business. Learning its nuances is an important part of your learning process and can be a more manageable and instructive approach than acquiring a portfolio of businesses right away. 

Follow Martell’s Replacement Ladder and take the time to understand each stage of the business before you delegate or attempt to replicate the business operations and processes across multiple businesses. 

 

Managing a Portfolio: Are You an Entrepreneur or Investor?

 

Whereas running one business is about being an entrepreneur, running multiple businesses is about being an investor. Managing a portfolio is about capital allocation, dealing with investors, and managing operations across different platforms. It’s a complex balance, ideal only for those already familiar with these landscapes.

When you’re managing a portfolio, you manage investments, not businesses. To do so successfully, you need expertise in wisely distributing a company’s financial resources and working with investors and lenders. Instead of being a business owner, you’re now essentially leading a private equity firm, which are two different, although adjacent, skill sets. If you don’t have a background in finance or private equity, that’s okay – but you’ll want to start with a single business acquisition before moving on to managing a portfolio.

 

Source: Investopedia

As a business owner, you’re going to be primarily an entrepreneur, but at the same time you’re keeping in mind the growth of the business based on your initial investment. On the other hand, in managing a portfolio, you’re largely an investor. However, if you haven’t run a business before, you can’t make strategic decisions for the individual businesses you’re managing in the same way entrepreneurs can because you’ve never had that experience. 

Even if you’re comfortable with a high amount of debt and can make the numbers work for a portfolio, I don’t recommend skipping over the valuable experience of running your own business. If you skip straight to managing a portfolio, you’ll always have a clear blind spot that you won’t be able to overcome, or you’ll need to work with a partner who has that operational experience.

 

A Journey of a Thousand Mile Begins with a Single Step

 

Running a marathon starts with that first step, and so does building a business portfolio. 

If you’ve never owned a business and you’re deciding whether you should acquire a portfolio, my advice is to start with one. Take the time to learn the ropes and understand the intricacies of business operations first. Gradual growth is key – rushing into too much responsibility can lead to disaster.

Being ambitious is core to who I am, but even I have to temper expectations with realism with my own businesses. It’s about setting stages – achieving a million in revenue before dreaming of reaching a billion.

Gain experience, build your confidence, and then consider expanding. This way, you’ll ensure sustainable growth and long-term success in your entrepreneurial journey.

Ready to acquire a business in the next 12 months? The Acquisition Lab is your first stop. Reach out to us today and get on the fast track to becoming an acquisition entrepreneur.