You know the saying, “if it sounds too good to be true…it probably is?”

You know we love investing but we’re all about sending you into the business-ownership world with as much information as possible, and that means knowing the pros and the cons you may run into along the way. 

So we’re going to take an honest look at the ups and downs of owning each business model you may be looking at. 

Psst…this article is also going to help if you still don’t know what kind of business would be right for your skills and interests.   

First, let’s break down the three types of business models. You’ve got service-based businesses like electrical, HVAC, cleaning, or digital marketing providers. 

Then there are the product-based businesses like retail stores, e-commerce, and manufacturing businesses. 

Lastly, a term we’ve coined, system-based businesses. With these companies, you’re buying a system, like an online learning platform, SAAS, app, or network. 

Now let’s break down what we think are the common pros and cons of owning and operating each model.

PROS OF SERVICE BUSINESSES

Acquiring a service business means there’s no physical inventory to manage, or equipment required right off the bat…this means a low cost of entry and you’re not going to need a ton of money just to keep it running. 

The other great thing about owning a service business? Major flexibility. 

In most cases, you can tailor your offerings and prices to fit the market. This is a huge pro if recession worries are on your mind. 

CONS OF SERVICE BUSINESSES

Now for the unavoidable, gotta think about ‘em, cons. 

Yes, low-barrier entry is a huge pro, but it also means the competition to buy is going to be higher. 

And the other thing about service businesses, no matter the industry, they require human capital and finding the right people can be a big challenge.

The whole business is relationship-based, which doesn’t always transfer from one buyer to the other. So, if you’re a skilled people manager, this may not be a huge downside.

But if you’re a little uneasy about the idea of relationship-building, you may want to think carefully about buying a service business.

PROS OF PRODUCT-BASED BUSINESSES

In a product-based business, you have unlimited ability to scale to the size of the market, and growth doesn’t require more employees, a clear upside for anyone less interested in hiring and managing staff. 

Another huge pro is that you have endless opportunities to cross-sell, meaning you can sell multiple different products to the same customer. The thing we love about product-based businesses is recurring revenue. 

When your product has a long shelf life you can keep on selling with little effort to keep reproducing the product. 

CONS OF PRODUCT-BASED BUSINESSES

I hate to be the bearer of bad news here, but supply chain issues are still a pain, especially for product-based business owners. We’ve seen modest improvement since this time last year, but if you’re buying up a product-based biz, prepare yourself for waves of supply chain frustration. 

On that note, trade tariffs can take a serious toll on your operations, and requires flexibility and risk to pivot your business around. But the pinch is that product-based companies are not quick n’ easy to pivot. 

Whether it’s around supply chains, tariffs, or changes in market trends, creating a new product is not as easy as changing your service offerings. 

PROS OF SYSTEM-BASED BUSINESSES

Similar to service businesses, you’re buying up pre-existing software, so the overhead costs in systems are low. 

If the opportunity to jump in on a low budget is up your alley, systems-based biz may be perfect for you. Being able to shift and adapt to your market with the right upgrades is also a mega-upside. 

System-based businesses are often subscription based, so you immediately have a recurring revenue stream…bonus!

CONS OF SYSTEM-BASED BUSINESSES

We could go on forever about the fun times had owning systems businesses, but we’d be remiss if we didn’t give you an honest look at the downside. 

Systems come with data security risks – so make sure you’ve got strong security vendors in place. Because they have so many pros and tons of potential, buying one up is highly competitive and not for the faint of heart. 

Ultimately, the systems-based world requires field experience to operate well. 

Ultimately, it’s important to remember that owning a business never comes without its challenges. The great thing is that these are just models – so you can apply system, product, and service model processes to whatever business you acquire. 

The opportunities are endless, as they say. But the key thing is understanding your skills and choosing a business that suits you well!

Still feeling unsure about what kind of small business you should buy? We’ll walk you through the pros + cons of each business model (plus share the exact step-by-step process to acquiring a business in our online course for small business buyers). 

…or if you’re really serious about getting started and want our exact playbooks, plus somewhere to ask all of your questions to the experts (that’s us!) in a weekly call, our mastermind is for you.

Yours Unconventionally,

Codie & Ryan

Co-founders – Unconventional Acquisitions

If you want to learn more about how to find and buy businesses, check out these articles

• Is Business Buying Right For You?
• The 5 Most Common Mistakes When Buying a Business Through M&A
• 5 Ways to Perform Due Diligence Before Buying a Biz

You can also register for the course here OR if you are serious about buying a small business, join our mastermind.