Ever thought of jumping ship into Business Acquisition?

Question

I've often pondered the thought of intimately learning an industry, scooping up businesses, and building a small empire much like RE investors do. Dry cleaners, nail salons, etc. Sure there's less of them than SFRs or even strip centers, but the cash flows of a business will be higher & there will be correspondingly less specialists competing. With good marketing and operations knowledge one could "rehab and flip" (or hold) their way to a business fortune.

I'm just thinking aloud here and would love what you guys with business ownership experience have to say.

Ashan D · Answer

Great information :) What do you think of doing business turnarounds (followed by a sale)?

My friend ran into a guy that has owned over 40 businesses. He goes in, fixes the marketing, streamlines operations, and trims the fat in administration. He is worth high 8 figures so he's doing something right!

Joel Owens · Answer

Larry as Mark said if you buy with the proper exits and structure going in multiple industries can work.

Generally owners are asking 3 times multiple. So if they profit 33,000 a year they are asking 100,000.

With these smaller businesses though the owner is generally the manager and find they have maybe one full time and a few part time employees.

The problem is when you add a manager back in because I am not going to run it the profit is now zero.

I have to get it at 2 times multiple 66,000 and have it make those net earnings without having to add back the owners salary in.

This is why smaller scale businesses do not work as well for acquisition. If the property came with real estate that I could reposition then I could just liquidate the business if I had too. If I am only buying the income stream and the equipment then that is a whole different story.

The biggest costs of a business are cost of materials, lease or mortgage, and labor.

Labor is hiring the right people and training correctly and scheduling effectively for maximum quality and work output for the profitability and growth of the business.

Leases is about having a great long term lease in place that is below market for a great location or renegotiating the high lease going in so the numbers work. For a mortgage it is making sure you have a long time low interest debt service locked in.

Materials is having fixed pricing contracts where you do not have wild fluctuations in your wholesale cost. If you are constantly up charging customers for increasing costs you will lose business and not stay competitive enough to do volume.

Just like real estate for every 10 dogs you see there is one gem to go after.

Mark Audas · Answer

Look for owners who are retiring.

That way you can purchase at a low multiple of owners earnings.

You should look for something of enough size that you can pay a manager (preferably a junior partner with some money for the purchase) and still be ok with the profits.  With some luck the young owner/manager can hustle up some additional earnings.  You also have an exit strategy and can sell to your manager at a higher price in the future.

Larry Flanagan · Answer

What types of business/industries work well for an absentee owner?

What sort of multiples are these typically bought at?

Joel Owens · Answer

Ashan from time to time I look at buying businesses.

I have owned some in the past.

I only look at buying existing businesses with proven models and margins growing every year over and extended period of time.

Many businesses are owner operators meaning they have to work at the business everyday. Investors on the other hand are typically "absentee owners" meaning we want a store manager and controls in place and built into the existing profit model.

This way I still check in on businesses I own but I am not having to run the business day to day. If I have to do that I would not invest as my time is way more valuable and money earned than dumping it all into one business.

If a business is losing money then the value is an asset sale only at maybe 10% of parts to liquidate.

Many businesses just like properties have "legacy leases" that were okay during the boom times but do not cut it now.

A typical deal is I put down 40 to 50% at a 2 times multiple of net profit and renegotiate the lease with the landlord for better terms. I model out the returns so I know I will get my money  back and if the business becomes obsolete I can get out quick with a profit.

You have to watch what franchise rules they are obligating you too and lease commitments.

As far as starting a business from scratch that takes a ton of time to build sales and momentum and startup cost is high compared to buying after someone else has spent the money.

You can find good deals when people have partners that split up, divorces, health issues, etc. just like real estate.

Business brokers like to tout people taking their IRA for retiring and buying a business. Generally they buy a franchise and it is way overvalued for the income stream it produces as an owner operator.

I saw it yesterday a guy that owns a Jersey Mike's sub shop I ate at. There many times a week grinding it out. That's not my idea of retirement.

John Evan Miller · Answer

There is a major difference from holding business opportunities and real estate.  It is a management issue.  In holding income producing real estate, the main concern is finding good steady tenants and maintaining the condition of the property.

Managing a business is much more complex and is full of many more financial decisions.  If you higher staff to run your business and they do a lousy job at it, the value of your business can easily crash to almost zero.  Additionally, I do not believe that there is necessarily a greater profit margin in running a business vs. the "passive" income that comes from real estate investment.

Honestly, when it comes to resale - that can be a real challenge. One, there are a lot less business investors than buyers for real estate. Two, a savvy business investor can easily start their own nail salon or dry cleaners so there is less motivation to purchase an existing business.

Just a couple thoughts on the matter. Let me know how it works out for you.