Is buying a business simply buying a job?

[Clinton]

Richard Parker argues that it's not such a bad thing if the business you're buying is simply a job.

I have huge respect for Richard but I have to disagree with him on this one. I feel he fails to fully take into account the risk factor. We've seen often enough that people invest in web businesses and get burned. When that happens they've lost not just their jobs but a whole chunk of hard cash as well.

Your take?

[KenW3]

I cannot disagree with Richard Parker for this. There are a couple of points: Every business bought is a job, even if run as an absentee owner. There are always responsibilities that go along with ownership, until size enables replacement of the need to oversee decisions. Every business can be a job, if the owner wishes to derive greater income from operations by taking on some of the activity that would normally be paid for.

We have had some of this discussion between buying a business and buying a job, and additional discussion on pricing of owner's activity in terms of stated profits for business revenue. I don't see anything wrong with buying a business as a job, especially if a job is needed. As all multiples of earnings paid would factor in the cost of management as an expense, this means that a lower price can be paid for a business which has an owner-operator.

[Clinton]

The way I see it is that salary is a reward for the time invested working for someone or running something (even if it's your own business). Profit is a reward for the capital invested and the risk taken.

You need to separate the two.

If all you're getting is a salary then you are effectively donating capital - and putting it at risk - all for zero return.

[Edmunds]

Clinton, you are of course correct.

However, think of "buying a job" from a different perspective. Imagine you currently have a job, and its sometimes good, but mostly crappy. Your boss is nice, and at the same time can be a complete a$$hole. Your subordinates are morons. Your next career opportunity will probably arrive in 4 years. For years you have been wanting to get out.

Well, owning a job is a way out. Its not quite like owning a business - you're not there yet - but its as close as you're gonna get without spending a gigantic sum of money. Its like fast-forwarding your career straight to CEO.

Obviously, from an investor perspective, owning a job is a nightmare. But from the perspective of an average person, its bliss. From the perspective of an investor, a business that makes $40k/year and requires a professional to run it 6 hours a day is worth nothing (or close) because you have to hire that somebody and it would cost you that same or even more than the $40k/year that business makes. But from the perspective of an under-employed person who currently makes $30k/year slaving away 10 hours per day in a crappy job with no opportunities (probably due to the crappy job market), and that business is related to something that person really loves doing, is that business still worth nothing?

[Clinton]

But doesn't your example make my point? The person you talk about who's making $30K a year works the same hours in the business he buys and generates $40K in the business. The reward for his work is still $30K - that's how much his hard work is worth - and the other $10K is his reward for the investment. If his price he paid was $40K he effectively paid 4x annual net profit, not 1x of the gross.

Let's put it a different way. Prior to buying the business he expected to get a cashflow of $40K a year and based on that he paid $40K. What if his expectation was a cashflow of $50K for the same effort? Or $30K? What price should he have been willing to pay for those cashflows?

[Denny]

The reward for his work is still $30K - that's how much his hard work is worth

One point I disagree with and have been hammering on other posts is; determining how much your work is worth. My experience tells me that one person can be making $30K a year doing the exact same job that another person in another company is doing for $50K a year. That's a fact. You're basing his worth at $30K because that's what he's making at a totally different company than the one he purchased. So that's why I've been saying that it's nearly impossible to put a value on what your time is worth. There are too many variables. My opinion on the thread title though is; once you buy a business, it's a job plus business ownership which is the best of both worlds. You now have total control of whether or not you keep your "job" with the company. You control your hours, your salary, vacation time etc.

[Edmunds]

But doesn't your example make my point? The person you talk about who's making $30K a year works the same hours in the business he buys and generates $40K in the business. The reward for his work is still $30K - that's how much his hard work is worth - and the other $10K is his reward for the investment.

Imagine John Smith.

2 years ago John finished university. His major was English literature.

John lives in Des Moines, Iowa. Not much work in Des Moines for people with English Literature majors. So he works as a secretary for a big firm boss, and makes a not-so-bad-for-a-secretary-in-Iowa $20k/year.

One day, he's mindlessly browsing through the internet and finds a blog for sale. The blog has had a steady audience for several years and makes $20k/year. The best part - the blog is about English literature. However, it needs to be updated daily and writing pieces is no small order - it takes basically the whole day, every day. Hiring a writer for the blog is impossible - hiring a professional for the job would cost more money than the blog makes.

Is such a blog not worth anything to John just because the amount of money he makes would be the same?

What about being able to work for yourself not for some boss? Is that not worth anything? What about having opportunity to do more than answer the phone as a secretary? Is that not worth more?

[benitez17]

Imagine John Smith.

2 years ago John finished university. His major was English literature.

John lives in Des Moines, Iowa. Not much work in Des Moines for people with English Literature majors. So he works as a secretary for a big firm boss, and makes a not-so-bad-for-a-secretary-in-Iowa $20k/year.

One day, he's mindlessly browsing through the internet and finds a blog for sale. The blog has had a steady audience for several years and makes $20k/year. The best part - the blog is about English literature. However, it needs to be updated daily and writing pieces is no small order - it takes basically the whole day, every day. Hiring a writer for the blog is impossible - hiring a professional for the job would cost more money than the blog makes.

Is such a blog not worth anything to John just because the amount of money he makes would be the same?

What about being able to work for yourself not for some boss? Is that not worth anything? What about having opportunity to do more than answer the phone as a secretary? Is that not worth more?

It might be worth something to John, but that doesn't make it a good financial investment. John would be better off buying a passive website making $8k a year net for the same amount of money so he can now make $28k per year, rather than effectively buying a business that operates at a loss.

[Clinton]

Edmunds, let's look behind the scenes.

1. Big firm boss regularly pays his salary, deals with business insurance, tax and other legal matters all of which he'd have to do himself if he's self employed. It all takes time and would need to be done in addition to the "paid work" he's doing.

2. Big firm can go bust like any other firm but for every one million small businesses that go bust only one big firm goes bust. Big firms are more stable, have assets like brand, stock etc., so are more likely to be revived and run by some other big firm if they do run into trouble. No such luck with the blog. Much, much, much higher chances of this guy losing his livelihood. One simple mistake like forgetting to renew the domain name and Wham! No blog, no earnings and no other big company in that locality you describe so very little chance of getting another job.

3. "It takes the whole day everyday". Not so with the employment. He gets weekends, holidays, annual leave, sick leave. Is there no value to peace of mind?

4. If he's made redundant from the big firm he gets paid redundancy. If the blog has to close he gets zilch.

Is such a blog not worth anything to John just because the amount of money he makes would be the same?

It is worth absolutely nothing. It's a business with a negative return. It's a waste of time. He may still opt for the blog because of the convenience of working from home, flexi hours or something else, but to me it definitely, 100%, doesn't make business sense. From the purely financial/economic point of view the blog is worth less than $0.

Using benitez17's example, if the guy buys a hands-free business making $8K a year and keeps his job, he's invested his $20K but gets $28K in the first year. If he reinvests this "extra" $8K in about three years he'll be making $20K a year from hands-free websites. And can kick the job.

Three years of employment. That's not long. Would you not endure three years of working for the big boss if that meant you could after that be earning $20K a year from a portfolio of sites and have all your time free to enjoy life? Isn't that a better option than kicking the day job for another more risky day job?

[Richard Parker]

Great forum folks. Clinton, you know I think the world of you but you missed the point of my blog post with your initial entry. However, you did "get it" later on when you mentioned: "The way I see it is that salary is a reward for the time invested working for someone or running something (even if it's your own business). Profit is a reward for the capital invested and the risk taken. "

That is preciserly the point - it's fine if buying a business equates to buying a job as long as the opportunity exists to turn that "job" into profits beyond basic compensation. And that my friend is something that can never be done working for someone else. Additionally, in today's employment market, even if that desired result (i.e. PROFITS) takes a bit longer, it sure beats trying to find a job or for those who are employed, it's better still to be an employer than an employee where there is no ceiling on one's potential success. Stay well and keep up the great dialogue.