Building versus buying a small business

I don’t think you should go out a start a business, but I do think that you can consider buying one.

People don’t spend time thinking about what it means to start a full-blown business and just see the results that some people (who had or developed the right skills) got with it. They don’t see the 99 percent; they only see the 1 percent. Yet, according to the website, the median income for small business owners is only $67,000. Hardly worth it if you consider that it typically included both husband and wife working twelve-to-sixteen-hour days six to seven days a week. Yet, as you look around, there are many people advising you to start your own full-blown business, quit your job, and put your life savings on the line. While that is the right approach for some, I think for most it is not.

But now think of how it might play out if you decided to purchase a small business by utilizing seller financing. As I mentioned in an earlier chapter, seller financing is when the purchaser of a business pays a portion of the sale price up front, and he then makes monthly payments over a set period of time until the rest of the purchase price (and the interest) is paid off. Let’s crunch the numbers of what would happen if you invested in a business using seller financing.

Imagine a business that can be managed by you in just four to six hours a week. That business has an asking price of $200,000 and throws off $48,000 a year in cash flow. What are such businesses? They are everywhere—coin laundries, Internet marketing businesses, online membership sites, small self-storage facilities, small franchises, and many other businesses like that. You are interested in purchasing it, but you only have $40,000 to invest. Does that mean you will have to miss this great opportunity? Not if you know how to use the power of good debt—debt that puts money into your pocket. Working with the seller, let’s say you agree to a deal like this one:

You buy the business for the $40,000 in cash you have saved up, and;

You commit to pay the seller the remaining $160,000 (plus interest) in monthly payments of $2,500 for eight years ($230,000 total).

Now the terms of this deal work for everybody: The seller gets the money he is owed for his business, and you get a Forever Cash Asset. Doesn’t that $2,500 a month mean a loss for you? Remember that the business, as is, is throwing off $48,000 per year, or about $4,000 per month. Even after making the payment to the seller, you are left with a positive cash flow of $1,500 per month. The debt that you acquired through seller financing has created a Forever Cash Asset that puts $1,500 into your pocket every month for the next eight years, and $4,000 after that when the business is paid off and 100% of the profits come to you!


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