What’s a good business to go into?

When I am giving a seminar to business buyers, the question they most often ask is “What kind of business is a good business to go into?” My answer is, “Any business that is making money today and will still be in in business making a profit in 20 years.” As you can see, there is a two-part answer to the question. What businesses make money today? Then what businesses can we expect will still be making money in 20 years? Let’s look at some possible answers.

Businesses connected to Owning Real Estate

The one area that I am absolutely sure will be around in 20 years is real estate. Construction of real estate may change but people always need a place to live and a store the equipment of their business, even if they chose to work at home instead of going to an office. With that in mind lets start with real estate and then go into non real estate related businesses.

Your home as an investment.

The equity in your home is an awful investment. If you own a $500,000 home and owe the bank $400,000, you have $100,000 in equity. Let’s say your home appreciates from $500,000 up to $600,000. Did this appreciation have anything to do with your equity in the home? Not really… It is paper value-a number on a sheet of paper-not an actual return on investment. Let’s say your home decreases in value from $500,000 down to $400,000. That’s a 20% loss in your home’s value. But what happened to your $100,000 in equity? It’s a total wipeout, a 100% loss of your equity.

Why is home ownership a bad investment?

Owning a home is always a zero return on investment until the day you sell the house and get a check for the equity. Until that day, your return is zero and all your equity is at risk. That is a no gain – lose situation; almost as bad as lose – lose. That is why you should have as little money tied up in your residence as possible. Consider putting that down payment and closing costs into a business instead. That business can earn you a return on your investment every month.
Owning Rental Property as an investment.
If you own an apartment building, for example, you can receive an income from it. Your home does not generate any income. Owning real estate is a business that can earn you income. I have owned apartment buildings and houses all my life. They have generated income that paid my living expenses even if I was not earning anything from my personal labor.

Owning Commercial Property as an investment.

I also own a small commercial building. Many times, over the last 60 years it has been 80% vacant. Thank God that I own it free and clear because the stable 20% rent that has always been occupied pays the taxes, insurance and repairs. If there would have been a mortgage on the property, the property most likely would have been taken over by the bank. Businesses don’t have to have a permanent place to ‘live’ like a person. They can move and leave the landlord they were renting from high and dry.

How to avoid the risk.

I have developed many personal financial policies because of my experiences. First, if a business owns the real estate it occupies, it fits my requirements for a profitable business to have. Second, the lesson is “that debt can kill you if you do not manage it carefully.” It does not matter how much profit you make on paper. If you need to have a positive cash flow that pays your bills. If you don’t, you can be on the street.

You should be looking at real estate connected businesses.

The first group are the real estate connected businesses. Those that will probably be around in twenty years include: public storage, hotels, motels, warehouse space, apartments, mobile home parks, group homes, and senior housing-of all kinds. The Baby Boomers are in retirement and their “Golden Years” are your golden opportunity. The next younger generations will be needing their spaces for weddings and other celebrations and the contractors that provide services for those celebrations.

You should be looking at real estate construction.

The second group of businesses that will be around in 20 years are those connected to real estate construction. That includes; general building contractors, mobile home manufacturing and all the subcontractors and suppliers connected to construction.

You should be looking at companies that service building owners.

The third group is businesses connected to the using and maintaining of real estate. All those services provided to commercial and residential real estate owners would be included in this group. This list would include; carpet cleaning, pest control, plumbers, electricians, painters, roof repair, gardeners, window & floor covering.

Businesses that rent space but do not own real estate.

This section is about good profitable businesses, not the real estate under it. The challenge is picking a business that can be profitable enough to keep you happy and then being able to run it intelligently in order to take home a profit.

Profit Margins

As a general rule, 20% of all companies in any industry make a very good living, while 80% are losing money or just getting by on a profit equivalent to a paycheck. These percentages vary from industry to industry and change over time.

Lower Profit Margins

Grocery stores, automobile dealerships, lawn and garden stores, and beverage manufacturers have some of the lowest average profit margins, hovering around 2 percent as of 2016.

Higher Profit Margins

Dental services, auto rental and leasing, real estate services, and accounting and tax prep services recorded much higher average profit margins during the same time period, ranging from 13 percent to over 18 percent.

Retail stores

Specialty retailers and general merchandisers — department stores — were the most profitable sector of the retail economy in 2009, according to “Fortune” magazine. They had a 3.2 percent average profit margin. Food and drug stores operated on a 1.5 percent margin. Automotive retailers operated on an average margin of 1.1 percent. Then things changed, Dealerships posted losses, with a minus 7.9 percent profit margin, Profit margins for retail clothing stores are generally within a range of 4 percent to 13 percent.

Restaurants

Over half of all businesses purchased are restaurants, so it is worthwhile to look at them. A modest sized independent restaurant would be considered successful to gross $2-4 million yearly. They shoot for 15% profit if all goes well, but then they are lucky to earn any profit at all. There’s a saying in the restaurant business – “Our profits are measured in pennies, not dollars” I think the Restaurant Association is a bit off. In my experience the average is 5 to 8% profit. For several years after 2008, the National Restaurant Association has been publishing that 95% of the industry is not making a profit. That percentage had been holding true up until around 2015.

Why you might not want to buy a restaurant.

In Southern California, where I live, there are just too many food places for the population. The reason being that business buyers want something they can understand and is not too complicated to run. With all the food franchisers teaching their franchisees exactly how to run these food businesses, it appears to be an ideal industry.

What is not ideal about restaurants.

Rent can be 18% of their gross income in the metropolitan areas. (Way above the 10% figure used in the profit models. The latest, hottest food franchise ideas should make an above average profit until the public gets bored with it.) The number of franchisee stores increases until customers don’t have to travel very far to eat at this new favorite franchise restaurant. Now the people that like that food are spread over more locations. This lowers the income of each location.

An Example.

I remember when Cold Stone Ice Cream came out. It was the new hot place to go. Ventura Blvd in the San Fernando Valley had a store about every 20 miles between Ventura and Universal City. In less than five years there was a Cold Stone Ice Cream store every 5 miles or less. Every business has its day, and then it gets cold. Even the big franchises are not a sure bet. McDonalds closed 700 stores in 2015.

Brick and Mortar Stores vs. Cyber Sales.

Tenants in shopping centers have historically made a profit for themselves and the shopping center landlords. Now Amazon captures 4% of all retail sales in America. This clearly is reducing what is available for the brick and mortar stores. Department stores, like Macy’s, Neman Marcus, Nordstrom and Dillard’s survived a merger frenzy of 10 years ago. Now they are fighting to re-invent themselves so they do not go broke in the face of Amazon. Industries that you would think would be around forever like gas stations, car washes, and auto repair shops are not as stable as they once were. The number of gas stations has been reduced as the gas mileage of cars increases and larger numbers of electric cars appear. Most gas stations today have a convenience store too. The gross profit margin on gas has dropped so much that that the convenience store is now the major profit center, not the gas sales. Full service car washes as well as Shell’s mini car washes are in big trouble from the super-size car washes.

New Technologies

New technologies will affect industries that depend on face to face contact. It has been replacing the one on one person with phone banks. Who has not experienced human voices replaced by computer voices? The industries that probably will be hardest hit are: face to face Sales and Customer Service, Elementary Occupations, Caring, Leisure and other service occupations, Skilled Trade, Occupations, Process, plant and Machine Operatives. Two Oxford University researchers published a study saying that 47% of the current jobs in the United States will be automated over the next 20 years. The information technology researchers at Garner estimate that one-third of all jobs will be done by Artificial Intelligence (AI) in 2025. Think carefully of how this can affect the business you want to buy.

What are the good businesses of tomorrow?

There is now a new development to be taken into consideration. Artificial Intelligence will be replacing a large portion of our lower level work force. We all have heard that within 2 years we can buy automated cars. Have you thought about the impact to the taxicab business or Uber business? Soon you will call an Uber and it shows up without a driver. Think how this may affect the business you want to buy. Where will young people get that first job and start learning skills?

Another Example

I heard another interesting story. How about a car that can deliver 10 pizzas without a driver? Domino’s Pizza recently launched a high-tech pilot. They are looking for answers to questions like do customers want the car at the curb or in their driveway? Will they come outside to get the pizza if it is snowing or raining? Will everyone be able to enter the code on the keypad?

Changing Purchases

As purchasing habits change, less of consumer spending is going toward formal apparel. Major events still sometimes require such clothing, however. Enter rental apparel. A new wave of rental-done-differently companies have shifted both the landscape and the stigma surrounding rental garments. A recent shift to “athleisure” clothing that looks sporty but is not intended for sports use has impacted major brands like Under Armor and Nike. This looks like an opportunity for renting or reselling used clothing, such as the once worn dresses of very rich women.

What are the problems of the future?

What most businesses do is solve a problem for their customer. 65 percent of today’s schoolchildren will eventually be employed in jobs that have yet to be created. This is according to a U.S. Department of Labor report. Both educators and businesses have to teach students and employees today skills to solve problems we’ve never seen before and won’t see for years.

Where are the new opportunities?

Major breakthroughs will produce new business opportunities in Big Data. Big data is an accumulation of data that is too large and complex for processing by traditional database management tools. The demand for processing these data sets will offer many jobs. Nanoscience – Making microscopic machines for manufacturing or even to cure diseases. 3-D Printing – Printing physical objects you can pick up or even entire houses. Advanced Robotics – making smart machines that do not require human guidance. The Roomba automatic vacuum cleaner is just the start. Over 65 per cent of university students that enter university this fall will eventually enter careers and industries that don’t exist today. 70% of the businesses of 2038 do not exist today. The technical material taught in the first year of college today will be antiquated before the student graduates four years from now. This points to retraining or update training as a business opportunity.

Some Rules to Guide Your Thinking

Ask yourself what is it about people that will NOT change? Marriage, birth, growing up, growing old, death and some people will be fantastically rich. Therefore, some jobs will never go away: Sales positions will never disappear even if clerks and order takers will. Hospitals with Nurses and Doctors – some will be replaced with software and nanomedicine over time. Childcare, Teachers – elementary school, maybe high school? Tutors for the rich and the disadvantaged. Morticians. Exceptional quality service to the very rich, like butlers or the concierge in a major hotel that can get anything done for you. Road construction companies– unlike buildings, you can’t build a highway in a factory and deliver it to the site. Handymen companies, auto mechanics, especially for high price cars. Bars, Bar tenders and waitresses. Entertainers and their support staff – actors, musicians, athletes, bouncers, etc. Concert halls, catering halls, hotels. Lawyers will always have a place in this world and their legal support teams. Archaeologists, Researchers, Biologist and all types of scientists. Still a lot more…

Summary

When thinking about what a good business is to go into, consider what you see as the ideas of the future. Many ideas of the 1930’s comic strips and science fiction writers are the reality of today. Plan and think ahead. It will be exciting times for those that think, plan and dream of the future. You must stop thinking about yourself as a laborer or worker. You need to be a commander, an entrepreneur or at least a mid-level manager. If you’re not a leader in some way, you’re going to be out of work or barely earning a living.