Buying a business offers higher returns, but also presents pitfalls

Kyle Serrano
Kyle Serrano

Business ownership constitutes an attractive prospect for people looking for not only profitability, but also flexibility.

Many entrepreneurs and investors focus on creating wealth through startup ventures or such investments as bonds, real estate or stocks. They all offer benefits and risks. But buying an existing business — whether you’re paying with cash or using traditional bank financing — offers the potential for higher returns.

A real estate investment of $1 million would likely offer an annual return of 8 percent or $80,000. Based on historical averages for the Standard & Poor’s 500, a securities investment of $1 million would return 12 percent or $120,000 a year. In contrast, a business transaction of $1 million could be projected to return 30 percent or $300,000 annually.

If this return is so high, why doesn’t everyone do it? Buying a business doesn’t constitute the right fit for everybody. A lot of moving parts must be managed to ensure cash flow doesn’t suffer. New owners must be confident they can sustain or grow profits, whether that’s through economies of scale, operational efficiency, market expansion or product innovation.

That’s why one of the most important decisions when buying a business is who is going to run it. There are advantages and disadvantages to running a business yourself or hiring a manager. If you choose to oversee your business yourself, this will require time. But some people want that kind of control. On the other hand, many passive investors hire an employee for day-to-day management, giving them the freedom and flexibility of not having to consistently work onsite. This is an attractive quality of life for many investors with a more hands-off approach.

It’s important to understand your plan before taking any steps to purchase a business. Ask yourself these questions: Am I the right fit for this? Who’s going to run the business? Do I plan to grow the business? What are my goals and risk tolerance?

Once you’ve come up with the answers, you can begin looking for the business that best fits your experience, investment and personality. It’s a process that turns investors into successful business owners.