The ‘Size Fallacy’ in Entrepreneurship through Acquisition
Sometimes Bigger is Better
I’ve spoken with many people looking to buy a business, entrepreneurs eager to dive into the world of small business acquisitions. Often, their initial instinct is to start small — they believe this mitigates risk. But a key lesson in buying a business is: appearances can be deceiving, and nowhere is this more apparent than in the ‘Size Fallacy’ in acquisition entrepreneurship.
Imagine dipping your toes in the water before plunging in — that’s how many would-be entrepreneurs though acquisition approach buying a business. They believe a smaller company equals smaller risk. This is not always the case.
Smaller businesses, often run by a single individual, might seem like a safer bet. They require less capital upfront, and the financial commitments, at first glance, appear more manageable. But this is where the fallacy sneaks in. These businesses, due to their size and stage in the life cycle, carry a substantial execution risk. They are more vulnerable to operational missteps, and a small error, say a $10,000 mistake, can be devastating. In addition, these smaller businesses are often just “buying a job”.
On the other hand, larger companies, while demanding a heftier initial investment and potentially larger loans, offer a different risk profile. They often have a more mature infrastructure, with owners in executive roles and a team of operators managing day-to-day activities. The risk of failure is lower, not just because of the size, but due to their established nature and proven business models. And the legwork for buying a $100,000 business or a $2 million dollar business is often the same.
The crux of the matter lies in understanding the nature of risk in business. Acquiring a business, big or small, is never without risk. However, the type and magnitude of risk differ. In smaller businesses, the risk is more operational, while in larger ones, it’s more financial.
A larger company might present a greater financial outlay, but the risk of catastrophic failure is often lower. A $10,000 error in a company making $400,000 to $500,000 in seller’s discretionary earnings is far less impactful than in a smaller venture.
The path of acquisition entrepreneurship is laden with choices and risks. The ‘Size Fallacy’ is a reminder that bigger isn’t always riskier, and smaller isn’t always safer. It’s about finding the right balance, understanding the nature of the business, and assessing your own risk tolerance. Remember, in the world of business, as in life, the biggest risks often lead to the greatest rewards.
