Buying a business

[Cool Dood]

I think I initially thought of this when I came across a post on these boards by a fellow (a Hawaiian, as I recall) who was looking to FIRE, part of which entailed selling his business, and he mentioned that he was surprised just how low the typical price would be for selling a business (I think the consensus here ranged around the 2x profits mark).

Having browsed through some business-for-sale sites, I've seen that this isn't generally too far off the mark. So what I'm wondering is how, at only around 2x earnings, buying a business would compare to the relative complexity, risk, effort, etc., of starting a business from scratch, on the one hand, and how it would compare to holding shares of a publicly traded company, or real estate, etc. It seems on the surface like the kind of yield that would result in huge growth through acquisitions, fast consolidation, and an eventual rise in the price of buying a business to a significantly higher level.

I can understand that there's a comparably huge level of risk involved, and that it's concentrating large amounts of capital in a single holding, and that in many cases a significant chunk of the value of a family (or other small) business would reside in the very few people involved in running it. I can also see how there's a higher level of fraud and accidental misinformation when it comes to evaluating a tiny, privately-held business.

So... am I missing any big things? Does anyone care to take a stab at the comparisons to other forms of investing and entrepreneurship? It seems, prima facie, like a cheap way to buy some combination of income, customers/clients, business infrastructure, etc.

 

[retire@40]

1.  Whether you buy into an existing business or start one from scratch, you need to know what business you are getting into and you need to be good at it, preferrably very good at it.

2.  Buying into a business you understand is just giving you a head start by buying the business structure, client base, goodwill, etc.  Some people have more fun building a business from scratch rather than running the business (see the E-Myth book for more on this).

3.  In the beginning you need to have the capacity to wear all the hats;  operations, marketing, bookkeeping, hiring, firing, sweeping the floors, etc.

4.  Chances of success are less if you are just doing it for the money.  It takes passion, persistance, and intestinal fortitude.

5.  Put a REALISTIC business plan on paper.

6.  Go over your business plan with a good local lawyer and CPA, and utilize them as much as you can before you start up until the time you dissolve or sell the business. You would be surprised how much they can save you in time and money.

7.  Figure out your end game.  Every business is like a book.  It has a beginning, middle, and an end.  Many people don't think about the end.

8.  If you start a business with other people, make sure you own at least 51% and have majority control.

9. Don't be cheap. Pay your employees well, buy the best tools for them to do their jobs, and treat them like human beings. But let them know you expect them to earn their keep. If they don't care about your business, you won't care about their jobs.

There are many more things to consider, but if you want to start your own business, you have to be able to figure them out for yourself.

 

[wabmester]

compare to the relative complexity, risk, effort, etc., of starting a business from scratch, on the one hand, and how it would compare to holding shares of a publicly traded company, or real estate, etc.

Starting a viable business has the highest complexity and the highest risk, but the return is basically unlimited.   I FI'd at 38 by starting and selling my business.   It's the ultimate creative outlet.   Not only are you basically playing god in your own little world (you're a coder, so you probably know what I mean), but you're creating an organism that integrates with the real world.   You're adding value that didn't exist before you came along, and you're employing people.   It can be very satisfying, but it's also a major time sink and a commitment on par with marriage.

Buying an existing business is *much* easier.   It's like the difference between buying an existing home and building your own.   But the commitment is just as intense.

Investment real estate is a business, but it's much more cookie-cutter than other kinds of businesses.   The returns on real estate historically have been comparable to stocks, but with lower volatility.    And with leverage, it's possible to build a huge empire.   If you've never run any sort of business before, real estate can give you a great introduction into the mechanics of running a business, but it's pretty boring stuff IMHO.   Liquidity is much better than other kinds of business since just about everyone is an "expert" in real estate.

I've done all three, and I slap myself every time I think about doing it again.   Passive investing is soooooo much easier and less time consuming.   It's not very satisfying, and the returns are completely out of my control, but right now I enjoy those trade-offs. 

 

[Mr._johngalt]

Starting a viable business has the highest complexity and the highest risk, but the return is basically unlimited.   I FI'd at 38 by starting and selling my business.   It's the ultimate creative outlet.   Not only are you basically playing god in your own little world (you're a coder, so you probably know what I mean), but you're creating an organism that integrates with the real world.   You're adding value that didn't exist before you came along, and you're employing people.   It can be very satisfying, but it's also a major time sink and a commitment on par with marriage.

Buying an existing business is *much* easier.   It's like the difference between buying an existing home and building your own.   But the commitment is just as intense.

Investment real estate is a business, but it's much more cookie-cutter than other kinds of businesses.   The returns on real estate historically have been comparable to stocks, but with lower volatility.    And with leverage, it's possible to build a huge empire.   If you've never run any sort of business before, real estate can give you a great introduction into the mechanics of running a business, but it's pretty boring stuff IMHO.   Liquidity is much better than other kinds of business since just about everyone is an "expert" in real estate.

I've done all three, and I slap myself every time I think about doing it again.   Passive investing is soooooo much easier and less time consuming.   It's not very satisfying, and the returns are completely out of my control, but right now I enjoy those trade-offs. 

Man, wab.......I could have written this post (maybe I did in my past
life here) Anyway, I agree 100%, I too have "done all three". And....
I too have to "slap myself" to stay away from non-passive
investments, but it's much easier than it was 13 years ago.
Bottom line, I made the most money by buying businesses but I had the
most fun in real estate. It was all hard work though.

JG

 

[Mr._johngalt]

Just a quick note about business plans. My experience has been
that preparing one will help you more than the folks (lenders
for example) who are the recipients. I recall once I was buying a business (long time ago) and prepared what I thought was a kind of
crappy looking business plan to get the financing I needed.
I did not use a computer for any part of the plan, being basically
a technophobe. The bank Pres. said it was the best business
plan he ever saw, which made me wonder what those other poor
saps were showing him.

JG

 

[tryan]

Having been in RE for the last ~20 years, not enough can be said about being passionate about your chosen business. Need to love what you're doing more than loving the $$ return. Because when sh!t hits the fan - and it will - you'll need to dig deep to lift yourself out. There's no place to dig if you don't like what you're doing.

Frankly I think this is why most businesses FAIL in the first 2 years. People "loved" it when the $$ were there but couldn't find it in themselves to persist thru the hard time(s).