Buying a business
Some people start their own businesses. Many multi-millionaires got started that way. But that’s pretty hard – you need bright ideas, commitment, and determination, plus a bit of luck. The mortality rate is pretty high – some estimates show that 80% of new businesses don’t make it to their fifth birthday. So many people decide to buy an existing business. Don’t knock it; Fortune 500 companies do it, too, only they call it “acquisitions and mergers”.
Buying a business can make sense. It has an established customer list, and an established product. It will generate money from day one, unlike a start-up which might lose money for two or three years before you finally break into the black. Businesses are often available for good prices, where the proprietor wants to retire and is minded to take the first good offer that comes along. Sometimes they come with the real estate – a shop or restaurant, for instance. Sometimes you can buy the real estate at close to market value and the business comes along for free.
Buying a business has its downsides
But there are downsides. Personalities, for example, can have an impact. A cheerful, comic guy running a snack bar might have built up a personal rapport with his customers. If you come along and install a rather reticent, uptight kind of guy, some of that custom might drift away. You may also find you’re not on the same wavelength as the existing employees – or that they weren’t well managed. And sometimes the accounts have been made up on Prozac rather than conforming to proper accounting principles – buyer beware!
There are sometimes opportunities to take a middle of the road business and engage the accelerator. Re-brand, move up market, add a second line of service, and you could dramatically improve the profits. But you have to buy smart to take advantage of that – moving upmarket, if the business is based in a low income neighborhood, isn’t going to work.
The real estate might be worth more than the business. But if it is, what are you going to do with the business? And how can you get the right price for the real estate? All of this will give you headaches.
Buying shares – an easier way to buy a business
An easier way of investing in both business and real estate is simply to buy shares on the stock market. You may not be able to work the TV remote, but you can still have a stake in the success of tech companies like Google, Facebook or Oracle. And you can buy REITs to get a stake in offices, cell towers, apartment buildings, malls, or even farmland and forests.
Buying REITs – an easier way to buy real estate
The two alternatives aren’t mutually exclusive. You could invest in REITs at the same time as buying a car valeting business. If the business has a bad month, dividends from your REITs can help pay the bills. If you see a second outlet you could add to your business, your REITs can easily be sold to help fund the purchase. And just like a business, REITs should both pay you a regular income, and increase in value over the long term.