By 2013, we had purchased several Buy to Let properties that were generating a reasonable passive income.
My work as a freelance IT Project Manager contractor which started in 2006, was by now generating a very healthy annual income. However that income was far from passive and required me to work at the client’s site most days, with the occasional opportunity to Work From Home (WFH). I was literately trading my time for money, or as or American friends say, I was “trading time for dollars”.
Although the immediate monetary rewards of working as a freelancer / contract were considerable, the downsides were also considerable and included:
- No holiday (vacation) pay
- No sick pay
- No pension
- Termination (severance) of contract at short notice, if Business priorities change, meaning no security of employment
- No guarantee of contract renewal
- High likelihood of no further work at the client once a particular project is complete
So we started to consider purchasing / setting up other “bricks and mortar” businesses, to secure other alternative sources of income. The thoughts of being able to relax on a Saturday, after a hard week’s work, safely in the knowledge that you owned a business where your staff were generating revenue independent of your own physical effort was looking very appealing.
The trick was to try and purchase somewhere where we could “work on the business”, rather than “work in the business”. i.e. somewhere where we wouldn’t be
“trading time for dollars”, but could leverage the efforts of the people we employed. This would be a win, win situation, we would provide good employment to people, would empower the staff, and would avoid us having to micromanage the team.
We looked at and considered purchasing several brick and mortar businesses, including: –
Avoiding buying a Sandwich Shop – Option 1
A sandwich shop which was still trading, with several staff and a mixture of through the door customers and some commercial sales to businesses such as petrol stations
We dismissed this as an option, due to an inflated purchase for the goodwill, fixture and fittings. The accounts showed that the owner was working for the equivalent of less than the UK minimum wage.
This business went through a number of other owners after we had dismissed it. It was also devastated by bridge works that impacted passing traffic and is still at risk of new parking restrictions impacting customers who want to quickly pop in.
Avoiding buying a Sandwich Shop – Option 2
A sandwich shop which was closed and no longer trading. On paper this initially looked good. No charge for goodwill and it looked like a distressed seller, just trying to get out of their lease and trying to recover some of the cost of the assets they had purchased.
However on further investigation, we found that a Tesco Express supermarket and also a Greggs bakery / sandwich shop had recently been set up in a new, nearby development and that had decimated the shop’s existing trade.
It eventually re-opened a lot later as an ice cream shop.
Almost buying a Dance Wear shop
Again the initial impression from the sales agent that this was a good business, but this was quickly dismissed after a little investigation and a good look at the profit and loss accounts.
The sale price was around £40,000 plus stock. Issues included:
- Lots of old, dead stock with little chance of future sales
- The joint owners having to work in the shop several days a week
- The income meant the owners were effectively working for less than minimum wage on the days they were in the shop. This was the equivalent of paying £40k to purchase a less than minimum wage job!
- The selling agent was partially valuating the business on the new owner being able to expand in to online sales, rather than any value being already added by the existing owners in this area!
- The existing owners had already purchased a nearby property to set up as a dance studio, which had plenty of space to also set up a retail unit which would steal away any goodwill.
The owners eventually moved out without managing to sell the business. The original unit remained empty for a few years before a change of use. As expected, the owners transferred their retail sales to the other location, so would have been in direct competition with the business they were selling, assuming a non competitive action was not in place when they tried to sell.