Risks - Buying a 1 person business - solo owner/operator

February 21, 2023

by a searcher from Purdue University in Chicago, IL, USA

Businesses owned and operated by a single person and the associated risk doesn't get much attention.

I've seen it a few times, mainly with home service based businesses where work can be subbed or contracted out.

Curious if anyone has experience - good or bad here.

This presents a whole host of unique challenges. Any specifics you'd recommend looking out for in DD?

Updating: Thanks for the concern. This is a very real situation where I'm looking at a one man GC that subs out work on roofing, siding, gutters, and windows. He's doing half a mil SDE regularly by himself. Scaling this business with more staff and expanding geo is an attractive prospect. But this is definitely the career sales leader in me speaking...

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Reply by a lender
in United States

I funded a one-person business last November where the business owner/seller was the order taker ^redacted‌ The company had been established for over ten years and is well known as the 'honey-do-list' contractor business in a busy metro market supporting small residential and commercial projects such as painting, landscaping, cleaning, power washing, etc. The business contracted out the work and paid everyone###-###-#### The list of contractors and dates established partnering with the company reflected since the start of the company ten years prior. The risk at the time was related to talk with the current administration wanting to change law whereas businesses contracting out work paying employees 1099 would need to switch those contractors to W2 wages. If this change were applicable, the business owner would incur employment tax expenses, etc. The buyer was aware of this potential risk; the underwriter was mindful of the potential risk. The conclusion was that the underwriter is to underwrite based on today's fact findings. Not what could or may not be if and when the US administration changes. The deal was funded, and the buyer transitioned successfully; he also retained his full-time W2 corporate employment and decent salary on top of the solid cash flow of the business acquired. ‌

Reply by an intermediary
from Rutgers in Cherry Hill, NJ, USA

I just closed on a similar type transaction a month ago as the broker. To simplify my response, I think there can be good deals found especially since you should be buying at a deeply discounted multiple. It takes a lot of diligence on your part (not so much a team) so pursuing the deal costs almost nothing except for your time to investigate. I want to know how much the seller is key to (1) the revenue generated, (2) operational skillset that leaves after the sale, and (3) any relationships, internal or external, that are sticky to the seller not the company. The other company I sold with a solo operator was a real estate services business that operated like a tech company. All sales came in from the website (all strangers), no customer concentration, staff were 1099 techs, and the owner's skillset was not unique to him. To boot, it was very scalable. It was a fun one to work on. The new owner is running it from out of state. I wouldn't necessarily walk away from it. Qualify the deal as best you can.

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