While I am not sure about you but I know that I have been beat up in the stock market over the past couple of decades. For many investors, there are typically 3 types of investments that they consider
Shares in companies or indexes on the stock market
Real Estate including rental units and commercial property
Interest bearing bonds
Often they look no further, however there is a good option…
4- Buying a Business….
Not very often do investors consider buying a business. However, here are some reasons why buying a business could make sense.
Higher Returns on your money!. Typically businesses sell for 3-4x Sellers Discretionary Income (profits) plus assets. If I told you that you could consistently get a 33% Return on Investment (ROI) on your money in the stock market or real estate properties you would probably call me a liar and rightly so. Yet there are many profitable small businesses where these types of returns are possible.
Growth Potential. A few years ago I sold a business where the owner was making a couple of hundred thousand dollars but was tired. The new owner took over and grew the business based on some ideas of the previous owner and his own initiative. He told me a few years later that he was now making over $1 million dollars a year in profit and considerably more in sales.
Stability: The stock market is subject to significant volatility based on changes that are often out of control of the private investor. The economy, politics, and global market conditions can drive shares up or down, often to the detriment of the small investor. Owning a business is subject to much less market volatility with much more ability to control one's destiny.
Leverage: It is true that it may take considerably more money to purchase a business than to invest in the stock market, however, with business banks or vendor financing, the return you get on your actual investment can be very very significant.
So How Do I Make Money by Buying a Business?
Typically there are Three ways to make money with a business.
Profits and Sellers Discretionary Income. Playing to win should be the motto of every investor. This is no different when it comes to buying a business. Your intent should be to buy a business that can give you a return on your investment and make money for you. These can come in a number of different forms including Profits and Benefits. Ideally you want a business that gives you a profitable return year after year but also there can be some other benefits to business ownership that include business write offs; that benefit the buyer. These might include cell phones, entertainment, travel, asset purchases and amortization. They could also include jobs for family members and other social benefits that make an impact on your world and the people in it.
Passive Income on property Purchase. If your business doesn’t come with a property, you might wish to purchase some. Owning a business is a great way to pay off a mortgage on a property that you own long after the business has been sold again. In fact banks are often more positively in favor of financing a property where the business is located. This enables you to put your lease or rent money to work paying down a mortgage and subletting other parts of the property for passive income.
Increased valuation. In the first part of the article I told you about a business owner who bought a business for several hundred thousand dollars and because he was able to grow the business it was now worth millions. While not every business purchase appreciates as quickly, buying the right business enables you to sell the business later for much more money.
What Should I look for in a business?
Profitability and Profitability potential. Most investors want to buy a profitable business and you should too. However, recently I sold a business that was marginally profitable at a great price because the new owner saw the potential to turn a small profit into something much bigger.
Consistency of Revenue and Multiple Revenue Streams. I have seen businesses that have sales that fluctuate wildly from one year to the next. As an investor this makes me nervous. Look for businesses that have consistent business revenue and a variety of revenue streams. This might include different types of product or service lines, geographic territories, and a variety of customers.
Growth Potential- Buying a profitable business that pays for itself over the period of a few years is important, however if you want to increase the value of your investment you should be looking for a business that has significant growth potential.
Systems - A business operating without systems if hardly a business. You want a business that relies more on systems than on particular team members. People are hard to replace unless you have systems or processes that ensure the business continues to operate when some of the team moves on.
A management team. Good businesses have a team that can run the business even when you are not around. Look for a business that has some key staff that you can rely on.
Focused Business: Sometimes when business owners get ready to sell or retire they lose focus and as a result, sales and service take a dip. Be cautious when buying a business where the owner has let business sales slide.
Industry and Passion: Your passion for a specific industry or business can play a significant role in your success in a business purchase. Yet I often have business buyers who are looking for profitable businesses regardless of the industry.
Use an Opportunity Analyzer. Having clarity about what opportunities make sense for you can often be overwhelming unless you use some criteria. I have developed an opportunity analyzer that helps you write down those criteria and enables you to decide quickly. Email me if you would like me to send it off to you. dave@businessrealtor.ca
Buying a business may or may not be for you, however if it is, I am happy to play a part in helping you find a great business that enables you to move your life and prosperity forward.
Check out some of the listings we have available right now that might make sense for you.
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