Buying a business/Leverage

[Burnsie]

I am a big believer in using index funds along with 401Ks, etc for investing. However I am expecting a good amount of money to come in the next year with the sale of an invention and a business. I was thinking about taking this money (maybe as much as a few million) and leveraging up by buying another business with a niche. My understanding is this business would return 8-15% annually due to it's niche no matter where the economy is at. It would take very little work for me to own/oversee as long as I have the right staff in place. Plus it would stay profitable for many years.

Here is the breakdown of my example. If I took the money (2 million) and invested it in the stock market, I could earn maybe an average of 5-7% annually going forward. So 7% on 2 million is $140,000 per year.

If I took the money and bought the business, I would use the 2 million as a down payment. Then I would have to take out a loan for 6 million to cover the remaining cost. With a 8-15% return, it would take possibly 8 years to pay off the loan. Then I would be earning that amount in profit.

What would you guys do? I am 37, not married with no kids. Living a high end life is not that exciting to me. Although I would like to travel a good bit and do some more volunteering. Is it worth the risk which I think is minimal? Although the stock market is still a risk as well.

 

[Meadbh]

If the risk of a small business is minimal, why isn't every investor getting in on it? The failure rate for start ups is horrendous. If this niche business is already established, why is the owner selling it? Is it profitable? Where is the business plan?

 

[Burnsie]

It's a new business although through a franchise. Part of the niche is location and it is all about getting into a new area before others are there.

 

[scrinch]

Let's see.....$6 million in debt. Hmmm, not likely to get many takers on a board full of no-debt, LBYM-ers. What happens to the $2 million if the business doesn't work out like you thought?

 

[daylatedollarshort]

I would kick back, travel, have a bunch of interesting
hobbies and live off the $2M invested in a conservative portfolio. Maybe work part time, work from home, do some consulting or something else low stress / low risk to keep my brain engaged, supplement the investment income and maybe earn some more SS credits.

But that's me. There would be no Bill Gates in the world if everyone was like me because I'd check out and head to Aruba with a beach chair and a mystery novel long before I ever got to $50 billion dollars.

 

[pb4uski]

Your investment is concentrated rather than diversified and that lack of diversification brings higher risk that if the business falls on hard times you lose your $2 million.

If living the high end life is not of interest to you then why risk it? Especially when you can invest in a diversified portfolio of stocks and bonds and live off it and enjoy life.

IOW, even if you won this bet and doubled your money, would your life be sufficiently different with $4m than it is with $2m to justify the risk of losing it all?

 

[haha]

There must be worse ideas, but at the moment I am drawing a blank.

Ha

 

[pb4uski]

 

[Bestwifeever]

That sounds like a lot of work, the whole part about getting the right staff in place so you don't have to do any work. And then you don't turn a profit for maybe 8 years while you pay off the loan.

 

[clifp]

What would you guys do? I am 37, not married with no kids. Living a high end life is not that exciting to me. Although I would like to travel a good bit and do some more volunteering. Is it worth the risk which I think is minimal? Although the stock market is still a risk as well.

Why sell the business in the first place. Presumably if you can get two million for it today it is profitable or has the potential to be so soon?

If you are worried about being bored continue to run it for a while.

I greatly admire guys like Elon Musk who take their 200 million from Paypal and then use it all to start new companies, but for every guy like Elon that manages to keep all three companies afloat after putting ever dollar he owns into them, there are a dozen who go flat broke.

You have 2+ million assuming your other investments are reasonably substantial. At 37 you've won the game well done. If you want to keep playing you better have a pretty damn good reason why. Leveraging up sounds some crazy betting scheme at casino.

 

[daylatedollarshort]

Can you start something new that makes more use of intellectual capital so you can keep your funds invested? Or at least invest in something new that doesn't require the whole $2M?

Why risk losing it all when you can be FI now with the money invested and sustaining a nice life with travel and extras?

Once you are financially independent such large risks with all your money seems counter productive. Plus you aren't accounting for the opportunity cost of your own time. Investing the money will take some initial work, but setting up a franchise would involve hiring and firing people, ordering supplies, local marketing, real estate contracts, etc.

What are you really making per hour with each investment? Investing the money can generate mainly passive income. The franchise would be a full time job, at least at first. Employees aren't going to hire and train themselves.

Borrowing $6M is not a minimal risk unless your net worth is $100M+. It sounds like some franchise salesman is drooling over your $2M investment and telling you what you want to hear.