Thoughts on buying a used business?

April 13, 2009 11:30 AM

Lately, I've been toying with the idea of buying a used business. It seems like if the business has been running for a while, then it's a proven concept that somebody with resources could just step right into. Has anybody done this and did it work out? Also, any recommendations for a business that is recession proof and that can deliver a moderate amount of passive income (say in the 7 to 9K per month range)?
posted by willnot to work & money (18 comments total)

If it were that easy, everyone would be doing it. And believe me, someone who really knows a type of business would almost certainly be willing to pay a lot more than someone who wants to "just step right into" a huge passive income (assuming you mean that the 7-9k would be profit.)
posted by Tomorrowful at 11:38 AM on April 13

"passive"? I'm not sure what you mean by this. Do you mean you want to get $7000 per month for not doing anything?
posted by amtho at 11:54 AM on April 13

Why would someone sell a 'passive' business if it's generating good money? For that mater why would they sell a non-passive one?

I'm my experience small business succeed largely on the staff, specifically that of the owner. The owner's relationship with the customer, suppliers and clients are what makes it successful, not the specific type of business or the location. Sure, these last two are important as well, but business changing hands always leads to a drop in business and it's up to the owner to get it back. (ie:Not passive income but blood, sweat and tears income.) Sometimes it will recover and even exceed the original owner, but usually not. If you don't have the vision of the original owner, it's hard to keep the business focused.

Franchises help get around this by packaging the whole business for you. But they also don't bear any of the responsibility if you fail.
posted by Ookseer at 11:58 AM on April 13

My in-laws took over an ice cream parlor that had already been around for several years. They just happened to be in the right place (on vacation in a spot they loved) at the right time (the owners were looking to sell the business), and were able to get a loan to cover the expense. They've now been running it for close to 25 years and it does very well. That said, even though they only work in the summertime, it's a lot of work. Resort town ice cream dipping is definitely not the type of job where you sit back and watch the cash roll in - they work 12 hours a day, and only recently started closing the shop for half a day each week so they could relax a little.
posted by LolaGeek at 12:00 PM on April 13

How much are you looking to spend to acquire this business? The closest thing to what you are looking for might be long-term real estate ownership, but your term has to be pretty long not to be affected by things like what has been going on lately in our economy and with respect to real estate. And it's going to require a lot of capital, and most business models wouldn't expect income but would use that to pay mortgages and other carrying costs.

There are certainly businesses that are relatively stable and unaffected by broader economic issues ("recession proof" is a bit strong), and some of them probably provide that amount of income. (And I suppose that you could take some portion of the profit and pay an experienced manager so that it is as passive to you as possible.) But they are likely to be much more expensive to acquire than you expect them to be. I also suspect that a business being relatively unaffected by recessions has a lot more to do with the management and past strategic planning than it does some magic idea that will just throw off money.

It sounds like what you want is some sort of annuity or other financial product. $2 million might give you that kind of income.
posted by iknowizbirfmark at 12:07 PM on April 13

Basically what you're looking for is an investment that will return $9/10k per month without doing any work. Like any investment the return is going to be relative to the risk. Unless you know some secret, you should expect all investments to have the same kind of risk/reward ratios.
posted by delmoi at 12:08 PM on April 13

Maybe stating the obvious but a frequent term for this is turnkey or turn key businesses (as in, all you have to do to start is turn the key in the door) - be aware this is also often applied to franchises as well, and if you are using it as a search term it churns up a lot of "automatic website business will earn you thousands weekly!!!" crap.

I have researched this from the other side on behalf of a small business owner. It is certainly possible, it happens all the time (it's one of the places "under new management" signs come from). Things to be aware of off the bat is that people wanting to sell their businesses are often looking for a BIG payout. They want to realize the investment of their years in building this thing, there are frequently substantial capital assets, and the individual selling is looking to either move onto something more ambitious or to retire - either way requiring a large pool of capital. There are businesses of all sizes of course but you get what you pay for like anything else. There is the possibility of profit sharing deals etc. to reduce the up-front investment but this of course draws against your income and in my experience (admittedly in a very specific, particular business area that might not be representative) there was less interest in basically relying on someone to run the business well enough to pay a steady dividend than to just cash out.

You will need a lawyer and an accountant with experience in this kind of venture.

I don't know what you mean by "passive" income, there's no such thing as passive income from business ownership, the less personal involvement you want with the business dealings the more you're going to have to pay for operational expenses, the more you're going to have to trust other people to do right by your interests (and the potential for fraud against the owner in the case of a small, wholly-owned business is very considerable) - if someone has a business that is essentially running itself without ongoing investment to the tune of approaching 10K monthly why in the world would they sell it? If you're not talking about running a business then you're talking about basically an investment and the economics of investing in a standalone business are similar to any other. If you aren't actively running the business (i.e. investing your time in exchange for profit) you'll be hard pressed to realize profits substantially superior to conventional investments.

The conclusion I came to from the other side of the question was that finding a good buyer was going to be a serious challenge because people with that kind of money to spare were understandably leery of turnkey businesses, because basically buying a business lock, stock and barrel is a not infrequent way for people to turn a pile of cash into a whole lotta nothing. I figured it could be done but it would be a long process with a lot of false starts finding someone with both the capital to invest and the knowledge and temperament to run the business.

Your local metropolis has a small business association. There may be good people to talk to about this there.
posted by nanojath at 12:12 PM on April 13

I'm thinking of something like a laundromat. I can imagine that involving some maintenance and some accounting. Or, something like a gas station that would involve inventory and again some accounting and some maintenance. Obviously as part of my due dilligence, I'd be looking to find out exactly what the owner has been doing and learning everything about the business, but from the outside looking in, those types of businesses seem largely self-contained.

However, gas stations are out of my price range for the most part, and there are so many laundromats for sale, that I'm cautious about that type of business.

From looking at some of the businesses for sale sites, it looks like businesses in my area are offered at about 3 times adjusted net.
posted by willnot at 12:51 PM on April 13

Seconding nanojath :
the less personal involvement you want with the business dealings the more you're going to have to pay for operational expenses, the more you're going to have to trust other people to do right by your interests (and the potential for fraud against the owner in the case of a small, wholly-owned business is very considerable)

It's possible to buy a turnkey business that meets your criteria (Plenty of reasons, good and bad, why people sell their businesses) but you'll likely be paying a manager-type person (or more than one) 30-80k a year to manage a business for you to make that 7-9k a month.

Heck, even something simple like a pizzeria or a laundromat in a good area could turn that kind of profit but you could make a lot more out of it if you worked the business as well. Or if it was less turnkey and you did more of the management yourself.

Are you looking to keep a full-time job while the business makes you money or do you just want to play XBox all day while someone else makes you money? In the first case, you might want to aim for something that takes less management and people issues and in the second, good luck, let me know when you find it :)


Seriously though, a laundromat or a gas station (gas stations have special financing available) is only as good as the location, location, location. A laundromat can boost profits with extra services like drycleaning (outsourced) and pickup/dropoff. They are cash businesses so some people make what they can and sell off to move on to other things. You would need to seriously research the lundromat business and learn what that entails (environmental fees and other issues abound) before making that swing. Even so, you'd need a large place with lots of local business to hit your 7-9k mark after maintenance/repairs/employees/rents/fees/water/electric/etc but it is do-able. Plenty of resources out there for both venues.
posted by emjay at 1:08 PM on April 13

You've probably already looked at Loopnet, but if you haven't, you should.

Keep in mind that financing a business is a lot different than financing a house - they're going to require you to have a significant net worth, and you're not going to get away with a small 10% down payment (unless you're doing owner financing with a very nice owner).

I have a real estate LLC, and I would say that you would need to spend 1.5 mil to get an apt. building that will gross 150k and net 50k. That's a lot of dough! You would probably get decent returns and have a lot less work if you did your research and invested the money into the stock market instead. It is an excellent time to buy stocks, and some have tremendous potential.

I'm not that familiar with the laundromat business, but here is a laundromat blog: The Laundry Capitalist.
posted by Ostara at 1:19 PM on April 13

Storage Units comes the closest of anything I can think of. Even then, you'll need to be on-call for your customers at all hours. You'll need to greet new customers, sign contracts, show them their unit, etc. When they move out, you'll need to clean out the unit, and repair any damage. When they've lost their key at 2am, you'll need to be able to let them in.

This is the lowest impact business I can think of, but you'll still need to dedicate a good 2 hours per day, every day to make it run. That doesn't sound bad, but those 2 hours are going to be spread randomly throughout your day. It's not really something you can do in conjunction with a full-time job.
posted by Eddie Mars at 1:22 PM on April 13

I bought an existing (retail) business. The seller was moving and wanted out. I bought the whole business which included fixtures for far less than I would have paid and inventory at cost. I knew the type of business well, operated it successfully for 5 years, then sold it profitably. Be wary of any formula for valuing a business; the market value of a business is not that easy to gauge.

Passive income is harder. The traditional means of generating passive income from buying a business is the stock market. You give them capital, they give you profits. Rental property might be a possibility; with the real estate market depressed, you might be able to buy rentals. It still has risk, but can be a good investment.

You might be able to find a small business that has expertise and needs capital for inventory, or expansion. You have to be able to assess the business plan to see if it's viable. That's what venture capitalists do on a bigger scale. Some franchises have made people wealthy, but it's a big risk.

Buying, owning/managing and selling a small business was a lot of work and an incredible learning experience. It's a lot more fun if it's a business you like.
posted by theora55 at 1:26 PM on April 13

I'll just put in for perspective that the business type I was researching was way the hell on the other end of the spectrum from laundromat ownership (high intellectual capital, relatively low infrastructure capital, impossible to run without a highly technical, 100% involvement type manager).
posted by nanojath at 1:41 PM on April 13

The wrong scenario for buying an ongoing business: the owner is losing money, and you think that you can make a profit.

The right scenario: the owner wants to retire and would not mind staying on as an employee or consultant for a year or so.

One possible scenario for the OP is mostly passive, but does require attention and maintenance: vending machines.
posted by yclipse at 2:08 PM on April 13 [1 favorite has favorites]

Passive income. I know exactly what you mean. A non-fiction book is one possibility. Picture books (coffee table books and souvenir books) fit this bill especially if you live in a tourist area. Childrens books are another area with strong residual income. Thats all the secrets I'm giving away but you get the idea. Create a one product company that is scalable. You would be amazed at the income you can create from one good product. Your initial capital is considerable but once the product is running through a channel successfully (you use a distributorship to handle day to day operations) your day to day involvement is minimal and usually just email and phone work. An ideal business for me is one where I design a unique non-copiable product, send a check to a manufacturer to have it manufactured, they send it my distrbutor. My distributor sends me a check. Fit a product into this business model. Information products like CD's and books work especially well. I've made tidy passive incomes in regionally specific book catagories, especially tourist ones. Dont bother with a publisher. Publish it yourself and not through a self publishing house but a specialty offshore printer. Singapore for example, for good quality picture books (coffee table books). Of course it would help if you are an accomplished photographer and writer with a understanding of sophisticated graphic design...my areas of expertise. Anything can be subcontracted for though it just adds a level of capital expenditure. The key is to do this regionally where it is easier to be a big fish in a small pond. Sometimes smaller is better. This is an oversimplification but this model does work. Checks in the mail are a beautiful thing.
posted by Muirwylde at 2:54 PM on April 13 [2 favorites has favorites]

Sounds like what you're looking for is an apartment building with a management agency. Passive, check, income, check, and now's probably as good a time to buy as any.
posted by alexei at 4:11 PM on April 13

Sounds like what you're looking for is an apartment building with a management agency. Passive, check, income, check, and now's probably as good a time to buy as any.

OP probably dodged a bullet not going through with that as his plan in 2004. At the very least, now is a better time to do it than then.
posted by iknowizbirfmark at 5:42 PM on April 13

On the subject of laundromats: My laundromat's owners open it at 6 am, show up to quick-clean it a couple times a day, and seem to always be working on a machine in parts in the back room by 8pm or so, and then they start cleaning for the night at about 10 pm before they close it at 11 pm (although if you've got 15 minutes left on your machine at 11, they'll wait for you). The "call for flooding or other emergencies" number goes to their cellphone. I don't think this is atypical, and I think they have another job in between those times. I get the impression that a laundromat won't make much if you have to pay for staff or repairs.
posted by mendel at 5:57 PM on April 13