Author Topic: Buying an existing business as an investment?  (Read 3896 times)

ML6

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Buying an existing business as an investment?
« on: September 21, 2014, 02:11:12 AM »
Has anyone done this before?

I am curious to know what your experience was.

I'm wondering if anyone on here has done it. Maybe it could be neat to have a collection of small businesses as investments?

*edited : removed reference to seeing a particular business for sale.
« Last Edit: September 21, 2014, 08:30:15 AM by 5holiday »

larmando

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Re: Buying an existing business as an investment?
« Reply #1 on: September 21, 2014, 04:57:23 AM »
I'd be worried it might be a scam. Strange situation and strange price for a business.

Also after hiring the employee your return is not that great (even putting the work you get 3.13 % to 6.25 % per year, you don't say if before or after taxes, with an employee hired you're looking at maybe 2 to 5 percent, with the relevant risks and nothing to show for it if the business suddenly dries up. sure, you may be able to grow it, but is it really that different than starting one yourself from scratch?)

ML6

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Re: Buying an existing business as an investment?
« Reply #2 on: September 21, 2014, 05:52:52 AM »
Great feedback.

Have you bought a business as an investment successfully before?

How did you find it and what did you look out for?


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ML6

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Re: Buying an existing business as an investment?
« Reply #3 on: September 21, 2014, 05:57:30 AM »
One clarification - not that the thread is exactly about evaluating this opportunity, but the revenue and expenses is one a per week basis.

But again, the spirit of the thread is about whether anyone has bought businesses as investments and what were their experiences. Sorry, I've been confusing.

Cheers!


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MidWestLove

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Re: Buying an existing business as an investment?
« Reply #4 on: September 21, 2014, 08:02:10 AM »
depends on what you are looking for and how you define each term - business ownership for me personally means something I am personally involved in, something I control (or have partial control over). business ownership at time requires investments, investments can include business ownership, or not (bonds ,etc).  buying a business (unless you are very rich and can hire and control management team) is typically buying yourself a job.

common sense applies - if something sounds too good to be true, it probably is. there are many established valuation methods for various types of business activities with normal margins, capital requirements , legal environment, risks, etc.  if things are outside of the valuation models, ask yourself why? also, why is the current business owner(s) selling? how much of the value would stay ,etc. there are many, many nuances in purchasing a business and probably not something you will learn on a board :) there is entire consulting industry for that.

MidWestLove

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Re: Buying an existing business as an investment?
« Reply #5 on: September 21, 2014, 08:19:51 AM »
for your second question
"Maybe it could be neat to have a collection of small businesses as investments?"

i know  few people that do it, including in the e-commerce business but few disclaimers apply
- it is usually connected to their primary expertise area (hosting services, website and traffic optimizations ,etc)
- they know their areas really well (SEO expertise ,etc)
- they have industry connections and do not pay rack rates for most/all of the services
- they off-load all non-essential services  (book keeping, compliance ,etc) and focus on what they do well
- they have many side projects at the same time.
- they only work in areas there they believe they have specific insight or competitive advantage.
in short, people I know run small businesses as any other business. this is definitely not passive investment. it takes time, sweat, and at time tears to grow any of it.

if you are not willing to at minimum do the above, and hope to get passive investment out of purchasing small business, in my opinion you will be walking into area of high risk and soon be parted with your money.  any business practices being advertised for sell is also a huge warning sign to me unless it is industry specific marketspace, valuations are based on time proven models , and the advertisement is usually an invitation to negotiations. i.e. financial services/investment management practices sell when owner wants to retire, but that is a multi year process, with independent evaluations, books review, earn out schedule, commitments for continuing involvement for former owner(s) to transition clients, revenue projects, payouts linked to future results ,etc. in short, it is buying an established book of business, understanding how much of it is predicted to walk away, understanding well the revenue composition and profit margins, knowing the industry well, and having a plan on what exactly your competitive advantage is. again, not a passive investment, and definitely not for 5k (thousand times that, may be).


aclarridge

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Re: Buying an existing business as an investment?
« Reply #6 on: September 21, 2014, 08:21:58 AM »
Just two weeks ago I saw an ad for an ecommerce business generating 500-1000 per week at 60% profit. It was around 5k to buy.

Yeah assuming $750/wk revenue (split the difference) that's $23400 profit minus your employee (7.5 hrs/wk say) at say $15/hr is 5850/yr, i.e. profit $17550. Hard not to be cynical of these numbers - most businesses do not make a yearly profit that more than triples their market value.

But the question you posed is an interesting one and I look forward to other replies. I've always thought owning a restaurant would be a terrible investment most of the time (seems like many go out of business in less than 5 years) but in some cases it must work really well or else nobody would do it.

ML6

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Re: Buying an existing business as an investment?
« Reply #7 on: September 21, 2014, 08:28:43 AM »
I think I may have mislead people with my own example. Please ignore the example.

I apologize - I meant for the gist of this thread to be about advice from those who have directly bought a business for the purpose of investment.

I thought we may find out if it worked - how much time it took, how they might try again, etc.


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MidWestLove

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Re: Buying an existing business as an investment?
« Reply #8 on: September 21, 2014, 08:41:57 AM »
your question right now does not make much sense - you may as well ask people about starting a business (which requires capital and investment) and whether they would do it again, how long it took, etc.

what kind of business (each area is different in capital requirements, regulations , risk). otherwise it is discussing nothing in particular as averages here do not apply , starting a restaurant is different from starting a broker dealer operation

ML6

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Re: Buying an existing business as an investment?
« Reply #9 on: September 21, 2014, 09:01:18 AM »
Sure. If a moderator would like to delete this thread- please feel free to do so.


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larmando

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Re: Buying an existing business as an investment?
« Reply #10 on: September 21, 2014, 12:34:51 PM »
No, never bought a business. Some family friends bought or sold one (mostly local small coffee/tobacco shops), usually with a close look at price/valuations for the area and with the intention of working in it (plus hiring when needed).  It went well for them (for now, only a few years have passed) but it wasn't a super-small online business (which should be easy to create from scratch perhaps?) it was a brick&mortar licensed shop that could only be acquired that way.

deborah

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Re: Buying an existing business as an investment?
« Reply #11 on: September 21, 2014, 03:56:58 PM »
When you buy/start a business your first question should be - What is your aim?

Someone who once worked for me as a contractor bought small businesses (but not e-businesses). He bought businesses that were franchises where the franchisee had a big area, but hadn't built it up. He would then build the franchise up in the area and sell it for a handsome profit. He obviously had several aims: to even out his work hours (when he wasn't contracting, he was building up a franchise), to make money on the side by value-adding.

When I was contracting (which is a business), my aim could have been to be in a better taxed environment than employment, or to be able to pick and choose work, or to work in shorter chunks, or to access a different type of work...

Businesses can be very profitable - you can also lose everything you possess. They can chew up an incredible amount of time. Employees need management (including all the government reporting requirements).  I would think that an e-business would need to have someone look at it every day - employees get sick and need holidays - and you need to be available, probably when you don't want to be. If you don't plan to expend any time in a business, don't buy one!