Buying a business vs buying real estat

[Brian Kehoe]

In the current market with the prices of homes being so high does it still make sense to be investing in real estate or to be accumulating cash and waiting to see where the market goes? I’ve been reading articles stating how baby boomers are starting to retire and selling their businesses at a discount. I’ve been researching businesses for sale and many look profitable on paper. My question is in the current market would buying a high cash flow business where I can be an absentee owner be a better decision then investing in real estate now? My thought process is make the cash now and invest in real estate later but I’d love to hear anybody else’s insight. 

[Don Konipol]

Being successful as an absentee owner of a small or even mid size business is close to impossible.  Small and midsize businesses can not afford the quality of general manager that can successfully lead a business, wear the many hats necessary for a small business, or exhibit the entrepreneurial traits needed to ensure success.

The exception used to be the high end franchises like McDonalds.  However, with the more complicated operating systems and heavy competition, that’s not true anymore. 

[Chris Martin]

Quote from @Brian Kehoe:

In the current market with the prices of homes being so high does it still make sense to be investing in real estate or to be accumulating cash and waiting to see where the market goes? I’ve been reading articles stating how baby boomers are starting to retire and selling their businesses at a discount. I’ve been researching businesses for sale and many look profitable on paper. My question is in the current market would buying a high cash flow business where I can be an absentee owner be a better decision then investing in real estate now? My thought process is make the cash now and invest in real estate later but I’d love to hear anybody else’s insight. 

If you have the ability to manage managers, then for the next decade you will have the opportunity to buy out retiring Boomers in whatever industry you like. Maybe 6-8 months ago, I would have answered like Don, but I spent a day with an investor in one of my solar farm projects and I was absolutely floored. 

He has been buying businesses owned by aging Boomers, and the TAM (Total Available Market) for him is huge. Think about it. "10K a day" of Boomers retire, and many of the "S" type business owners really didn't develop a plan for how to exit their business. Lately he has bought local restaurant businesses, primarily, but also apartment buildings, land, MHPs, and other commercial properties. 

So, I'd encourage you to pursue business acquisition if you have the skills to manage managers. The best example I can think of is this. I met a guy in the 1990s who owned a Jersey Mike's franchise. He was an "owner occupied" franchise in that he was owner/manager/worker. I went there several times weekly. But he wasn't there after a few months. Maybe two years later, we (my W-2 working colleagues in the 1990s) saw him. He recognized us and we talked for an hour. He had 6 or 8 stores. He rotated between them, managing the managers. He wasn't buying out people, but rather expanding the franchise opportunities. 

Fast forward to now, and there is an incredible opportunity to buy out old folks like me. Aging Boomers have developed fantastic businesses, but they are old. Health, focus, will, and determination, along with a lot of other factors, will make Boomers want to exit. They need a buyer. Many times there is no one there. And the more motivated the seller is, the more willing the seller will negotiate terms and price. 

So, my answer is, to your conclusion "My thought process is make the cash now and invest in real estate later..." I agree, if you can manage the manager. 

[Don Konipol]

@Chris Martin

“Lately he has bought local restaurant businesses, primarily, but also apartment buildings, land, MHPs, and other commercial properties.”

Apartment buildings, land, MHPs and other commercial properties are investments in real estate, not investing in businesses you run absentee.  “Lately” he bought a local restaurant seems to indicate a recent purchase, as such we can’t judge if absentee ownership will be successful - or not. 

The Jersey Mikes example can be looked at two ways, neither of which (IMO) bolster your point.  One way is that he is “managing the managers”.  That is NOT absentee, that’s managing a multi unit operation.  I don’t know the individual personally, but the people I do know managing multiple units work 6- or more hours per week.  The second way is if he were absentee ( which he is not) he could have fit neatly into my “exception” for some successful FRANCHISE operations. 

Chris, you’re certainly entitled to your opinion, and yours is at valid as mine.  However, the examples you provide that “changed your mind” about success of absentee business ownership are either not business ownership but real estate ownership, or not absentee but multiple unit active management.  

So how is it that this leads you to believe absentee business ownership (of small or medium sized businesses ) can be successful? 

I stand by my analysis.  If you or anyone else has personal experience with quantifiable evidence of successfully owning a small or medium size business on an absentee/passive basis I would be interested in learning about it.  I’m sure they exist somewhere, but the vast majority of small businesses just don’t generate the income nor the margins to hire the quality of people nor the specialized skills needed to produce without the involvement of the owner willing to wear many different hats, pick up the slack where needed, and work the hours necessary to make the business a success. 

Statistics available from BizBuySell state that 80% of businesses for sale never sell.  So yeah, there’s tremendous opportunity out there.  For a hands on manager skilled in management principles and knowledgeable about the particular business sector.  However, that person purchasing the business shouldn’t expect to have any time available to handle outside activities like real estate investment, competitive golf, or child rearing.  

Someone buying an existing business for a fair value MAY be able to build a substantial net worth.  But, it won’t be easy, or absentee. 

[Nick Maugeri]

Quote from @Brian Kehoe:

In the current market with the prices of homes being so high does it still make sense to be investing in real estate or to be accumulating cash and waiting to see where the market goes? I’ve been reading articles stating how baby boomers are starting to retire and selling their businesses at a discount. I’ve been researching businesses for sale and many look profitable on paper. My question is in the current market would buying a high cash flow business where I can be an absentee owner be a better decision then investing in real estate now? My thought process is make the cash now and invest in real estate later but I’d love to hear anybody else’s insight. 

I recommend both. Purchase a business that is offered with the real estate. You can grow the business to sell and still own the property where the new owner can lease from you. You can increase rents, understanding the business' position, and that will increase RE value. Cash-out refinance and expand.