By Suzanne De Lucia CBI, Fellow Of The IBBA
2008 is not going to be remembered as a banner year in the financial realm for most people. Many are opening up their year end investment reports or looking at the real estate values with dismay. I myself think how hard I worked to save and invest, only to have a large chunk of my investment portfolio vaporize. I thought I was on track for a happy and secure retirement, but now wonder how I will regain my net worth.
So what can be done to recoup the losses and get back on track financially? What investment typically provides both a high return and control? The answer is business ownership! Investments are priced based upon their perceived level of risk and expected rate of return. This is why your FDIC insured passbook savings account pays you a sub-1% return. It’s the most risk sheltered place to put your money.
As you ascend the perceived risk ladder, you’ll find better expected rates for CDs, bonds, real estate and stocks. Business ownership is seen as the highest risk and therefore highest return investment commonly available. Rates of return for small businesses tend to range between 20% to 50%, simplistically stated that you expect your money back in two to five years. What better way to regain net worth than to get returns that are double to quintuple the average performance of your other investments!
So how do you live with this higher level of risk? First, find a business that you have the skill sets to maintain or improve. Don’t be lured by high returns in businesses in which you have no expertise. Business earnings are not cast in concrete, but tend to be very connected to the quality of management. You’re better to find an underperforming business which you can grow than to invest in a highly profitable endeavor in which you have no background.
Next, analyze what makes the target business work and identify the risk factors. All businesses have some risk, but make sure that there are no fatal flaws. Every question you ask should relate to likelihood of future income and the replicability of future income in your target business.
Remember the pet rock, a popular holiday gift of a number of years ago? That entrepreneur made a killing one season, but there was no demand for the product the next, thus no likelihood of future income. Replicability of income falls into the same category. Are the business earnings based upon the skill sets or personal connections of the current owner? A good business broker can advise you on ways to manage this risk.
One of the most appealing aspects of business ownership is your ability to control your investment. You are the captain at the helm of your ship. You are making the important decisions which determine how the business performs and are constantly on the alert for dangerous conditions. You do not have to wait until the next month to open an envelope and see how others handled your money. You also can’t be laid off from your own business, giving you an added level of security not found in the job market. More good news is that many businesses are selling at lower prices, so much of the risk has already been removed and you’re getting in at what is hopefully the bottom of the market.
For those who already own their own companies, the acquisition of an add-on business can be a fantastic way to see immediate growth in sales and profits with a small investment in relation to the benefits. It makes sense to find a business which can be effectively and profitably added to the existing endeavor. This is especially true if the business adds sales, new product lines, capacity, personnel or reduces expenses.
More good news exists with financing. Small business has always been one of the primary sources of growth in the American economy, so the government is committed to keeping the Small Business Administration (SBA) funded. SBA loans are government insured, so there is not a problem in finding investors for the loans as has plagued other lending markets.
Buyers are able to finance a business purchase and obtain working capital via the SBA for as little as 20% of the total costs. This is often less than the acquisition costs of the tangible assets! If you’ve heard that the SBA loan process is burdensome or time consuming, don’t play into the rumor mill. A good business broker can connect you with the right lenders who will efficiently obtain your loan.
Sellers who do not have businesses which qualify for SBA loans are often acting as the bank and helping buyers to finance their business acquisitions. Do not, however, expect a seller to willingly turn over his precious business to you with no strings attached. You must prove that you are both creditworthy and have the ability to continue to run the business he has spent a lifetime building. Expect to have skin in the game, with a good down payment and even some outside collateral.
The bottom line is that it is an excellent time to pursue that dream you’ve always had of owning your own business. The returns and rewards can be great when you find the business that’s right for you. You’ll be controlling your financial future and getting returns not typically available in passive investments.