In my last blog, I compared the concepts presented in my book Buy Then Build: How Acquisition Entrepreneurs Outsmart the Start-Up Game with Robert Kiyosaki’s Cash Flow Quadrant. Most of our articles emphasize the benefits of buying an existing business over starting one. These include the ROI, margin of safety, and the equity buildup which brings real estate economics into entrepreneurship.
For start-up entrepreneurs, it can be seen as a Moneyball for startups because you already have revenue, infrastructure, product market fit, customers, and earnings. When a business has earnings, it makes obtaining bank loans much simpler than a start-up.
I want to take a different approach continuing to expand on some of the concepts discussed by Robert Kiyosaki. The first step many people take to transition quadrants and start passive income is to start a side-hustle. We have this question come up a lot from Lab members as they try to determine whether they should pursue searching on a full-time or part-time basis.
Looking back at the decade I spent acquiring different business, one of my acquisitions was a side purchase. I acquired an e-commerce company on the side of buying other companies and it’s worked out beautifully. It has been my “side-hustle” for the last 5 years.
When you’re first developing your acquisition strategy, you determine what level of involvement you plan on having. Are you looking to go in and lead a company, manage the team, grow the business, and live that entrepreneurship lifestyle or are you looking to buy the four-hour work week eventually making millions in revenue potentially?
The purpose of this article is to really dive into what makes a good side hustle.
Path to Financial Independence
I feel like many people find themselves, despite having a certain job, wanting to do something different. However the need for or security of a paycheck keeps them from starting a business on their own. As a result, they explore the concept of “side hustles”.
For something to be a “good side hustle”, it must:
1. Be part-time.
2. Have strong potential for dollars per hour worked.
3. Leverage existing skills you have or provide a playground to learn new skills that you could merge with your existing job to grow to new heights.
4. Have potential to ultimately replace your income or your job.
When you buy an existing business as a side hustle, you get ownership – all of the equity. But the equity isn’t the biggest perk of being a business owner that you get to tap.
For some, a side hustle is their first journey into business ownership which also introduces claiming expenses. The means that you’ll be able to claim expenses pre-tax for things that you’re having to spend your post-tax dollars on now.
For example, if you buy an online business as a side hustle, your internet expense at home that you pay every month becomes a business expense. So, it’s pre-tax dollars. Depending on your business, you can make arguments for a home office or an automobile. Things like meals and entertainment becomes a line item. This lowers your taxable income in turn reducing your tax burden.
There seems to be no shortage of side hustles. Some join the gig economy and spend a few hours providing a service. Others drive people around with your car using services like Uber or Lyft. The second biggest side hustle is real estate. Someone can go buy a building with some leverage or all in cash and make a 7% cap rate with a hard asset which is an utterly fantastic kind of benefit. Others could start a website or a business on the side. Or you could buy a business as a part-time side hustle.
While this hasn’t been my go-to approach or what is talked about the most, it’s a perfectly valid approach.
An Unexpected Side Hustle Success Story
When I look back at my own experience, I bought one company to manage, I bought another company and put a manager in, and I even bought my own side hustle along the way.
That side hustle was purchased for about $1.2 – $1.4 million. It was doing about $1.9 million in revenue about five years ago. That business just closed out the year at $3.4 million in revenues after having success growing it during that time.
Although it took a lot of work up front, getting all the systems in place, leveraging all the people, understanding the business, and building up my own skillset. If I really think about it, I worked really hard for like three to 12 months. And then once the system was going and the different responsibilities were assigned with the team, it didn’t take a huge amount of effort to keep going. Now I probably work four hours a week on that business except for a couple of times a year for a special project.
Because I have income coming from other places, I don’t need the money that’s coming in so it’s very easy to outsource tasks. I pay for it through the earnings of the company. With a customer service team, a bookkeeper, paid ads with SEO, I’ve got no employees and it’s very lightweight.
Defining Your Path
The next question becomes what kind of online businesses should I pursue?
Online businesses is a broad category that can include and isn’t limited to the following types:
• Fulfilled by Amazon (FBA) businesses
• E-commerce stores such as Shopify or proprietary sites.
• Content sites which make money through affiliate links or ads revenue
• Online educational companies like Acquisition Lab that provide training and support specific to a topic
• SaaS (Software as a Service) companies
• Lead generation companies
Recipe for Success
The next question is, what skills do I need to succeed in this space? Well, it all boils down to these four things:
(1) SEO search engine optimization
(2) Pay Per Click/paid ads/social media marketing
(3) Project management skills
(4) Cash flow management
Because many times much of the team is outsourced, you have to keep a steady rhythm of the things that need to get it done so project management is crucial. The big one that is difficult to grasp unless you actually own a business is cashflow management.
Growing the Business
If someone acquires a $1 million in revenue business with 20% seller’s discretionary earnings ($200,000) using 90% debt, it’s going to cost a little less than a hundred thousand a year to pay principal and interest likely on a 10-year note. Over 10 years, if the money isn’t needed it can be reinvested into the business. More teams can be hired to make it grow faster. Debt can be paid down faster and own that company in five years instead of 10.
The goal is to learn how to leverage even just one of the abovementioned skills to increase one of three growth metrics for an online business:
(1) Average order value (AOV) per transaction
(2) Number of customers that you sell to
(3) Number of transactions per customer
If you buy a $1M company. You pay down the debt aggressively and reinvest to grow the business. In about five years, you would then own that company outright which went from a million-dollar acquisition to a market value of $1.6 million just in five years.
Then, you can either choose to sell that for $1.6 million – which you made in 5 years which is fantastic. Or you can continue to run that business. Now you’ve paid off the principal and interest, you’re bringing in approximately $320,000 a year from that asset that you bought five years ago
Yet again, you’ve got the equity buildup, you’ve got a part-time side hustle. And you’ve got a proven thing out there with having to sacrifice what many of us think is safety of a day job, more specifically the predictability of your current paycheck.
If you plan on buying a business in the next 12 months, please consider applying to the Acquisition Lab, our do-it-with-you buy side advisory service. Gain access to world-class education, support from our team of experienced advisors, a suite of tools, and a vetted community to help you succeed in that first acquisition or in implementing a grow-through-acquisition strategy.