Buying a small business can give you a much better return on your investment than the stock market or real estate.

Does that surprise you? It should. It surprises a lot of business buyers… even as they are in the process of buying a business.

People who are inclined to control the investment of their money typically think they have a few options:

• Purchase some real estate
• Invest in stocks
• Invest in mutual or index funds

Even professional consultants and investors think that this is really all there is. So unless you want to take a gamble on your cousin’s startup that is “100% going to be the next big thing” you should probably pick one of the “safe” choices… right?

One option that is commonly overlooked is buying a business!

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But is buying a small business a passive investment?

Typically not. Sometimes you’re buying yourself a job and ownership of the business.

While the stock market or real estate may seem passive, most people are still working a full time job while investing in those assets. But really, none of these investments are passive unless you can live off of the dividends without having to do any work.

Now, what does your money (invested capital) get you when you purchase a business, piece of real estate, or shares of a stock?

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Controlling your investment

You may be thinking, “well isn’t this risky?” and the answer is yes – every investment has their own ratio of risk vs. reward involved. When you buy shares of a publicly traded company, you have no control over if those shares increase or decrease in value. Investing in an index or mutual fund is usually safer than a pure stock but either way, you have no control.

With real estate, you have some control on the value of the asset by doing improvements and enabling rental income can be a predictable way to create revenue. Depending on the market or economy though, the value of real estate can change under an investor’s feet (or building).

Now owning a solid business that has a consistent demand on its service or product is a great way to have way more control over the performance (strategy and execution) and therefore reap the benefits of any profits above a salary that an owner/operator takes.

What about the return on Invested Capital?

Here at Chinook, we partially base a business valuation on the return on invested capital that a new buyer can achieve. This is done by looking at the personal money invested into a business, and the Seller’s Discretionary Earnings (SDE) that come back to the owner as cash flow. We typically see a 30 – 40% (and often more) return on invested capital. Meaning that for the amount of personal money invested in buying the business, a buyer would see between 30 – 40% of that come back to them as profit (on top of their salary) each year. By the way, that calculation does not take into account any growth in the business.

That seems pretty good, hey?

The buyer now:

• Has control over the operations of the business
• The ability to grow the business
• The satisfaction of being their own boss

If it’s such a great investment, why doesn’t everyone do it?

Well, mostly because it seems risky – but every investment has an element of risk. Since a business has more moving parts and complexity than investing your money into a mutual fund, most people see it as a more risky investment.

But buying a profitable business means that it has a proven track record of working. Of actually making money. As the new owner, your job is to keep that going, and hopefully improve it. The BDC targets a 4% default component on their lending to facilitate the purchase of a small business. They in practice have a 2% default rate as per a local manager. 2 out of every 100 businesses were not able to pay off the debt that was incurred to buy the business in the 5 to 7 year term of the loan.  

At the end of the day, buying a small business can be one of the highest returning investments to the average person, and a great way to feel in control of your financial future… if that’s what is desired. Some people would rather have a job, which is great! Others, who desire more control over their financial future should consider buying a business that they believe they can run like a star.

Interested in finding the right business for you? Check out all of our current opportunities here.