Life of an Investor

To buy or not to buy … a small business

Over the years, many times I have considered buying an existing business. It didn’t really matter what it was, I just wanted to be a business owner. It could be a fast food restaurant in a mall, an arcade, a carwash, storage units, etc. It’s that whole “controlling your own destiny” thing I guess. Several business types are almost guaranteed money-makers, such as storage units or a carwash and others are a little more risky, such as an arcade or mall food store. A couple of years back I met with a broker who assisted business owners in selling. I let him know that I was interested in buying, but he really kind of talked me out of it at them time. Especially with the restaurants, he indicated that in order to succeed, the owner really needs to be there 40+ hours a week for the first few months just to make sure everything is being taken care of. Well, I happen to have a job already and I wasn’t looking to buy myself a new one. I kind of like the security of my job, benefits, etc, so potentially cutting my salary in half and losing all benefits was not very appealing. Nevertheless, he continued to call me up every week when he had a new business up for sale, so I cut him off. I think I might have hurt his feelings, but I honestly wasn’t ready.

Just the other day, my wife told me that someone had told her that they were thinking about selling their small business. I’ll withhold names and details to protect the innocent, but it is a very niche market with a huge profit margin and low overhead. Obviously the owner just mentioned this in passing and probably hasn’t put a lot of thought into it, but it still got me thinking. I happen to already know most of the employees, some of them being in my family. Really all this business needs is advertising and the few employees pretty much run the rest. This business provides mainly a service, with very limited merchandising. This means that there is very little inventory besides office supplies and the main piece of equipment which would require occassional maintenance. Once again, this seems like one of those “can’t lose” opportunities. But then again, I don’t know any details yet. Maybe the owner wants $500,000 for the business. I really would need to see the numbers before I went much further.

Let’s talk about a few pros/cons in closing.

I was told by the broker that many owners will finance your purchase. For example, if they are selling for $100,000, they take 10% down and then let you pay them the 90% over the next 5-10 years with a reasonable interest rate. This shows that they have confidence that the business will continue to succeed and it is in their best interest to get you trained and help you when you’re getting started as much as possible. Often, they are not selling because they are losing money, but they just want to be out of the business. Maybe they are retiring, moving or just want to free up the capital for another investment.

Just like real estate, you are creating passive income. Let’s say I pay $10,000 down and the business is clearing $1,000-$2,000 a month in net income. Although it will take me 10 years to pay off the loan, my initial investment may be paid back in less than a year.

There are a couple of obvious disadvantages as well though. Especially with such a small business, the first time an employee calls in sick, I’ll probably have to ask my boss to let me off, so that I can cover for my employee. Thankfully, if the family members remain as employees, I would know that I can trust them not to call in if uneccessary.

If you own a house and it is vacant for a few months, it will hurt, but you can recover and the house hasn’t lost it’s value. If the business slows down, it will also hurt, but the less you are making, the less the business is worth. During this time, you will likely be spending more money than you’re taking in also which will add up after a while. Often I believe that people buy businesses for a certain amount, then after struggling for a year or two and slowly running out of money, they decide that they can’t do it anymore and need to sell. Unfortunately when they go to sell the business, the potential buyer is going to want to see the financials and they may end up having to sell the business at a significant discount off of what they bought it for just to get out alive.

Just like anything else, I need to be careful and buy only if it makes sense. I will keep you up to date with any more details as they roll in. If you have any advice or comments, please leave them below.

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To buy or not to buy … a small business

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