Don’t Read This Unless You Want to Get Addicted

by JT McGee

gas station, businesses for saleGuys, I have a confession.

I’m addicted to BizBuySell.com. It all started so innocently from an advertisement on another site. After a little bit of searching, I was hooked.

This site is like crack to anyone interested in business or investing. I mean, there are literally thousands of businesses for sale at any one time. And the ads are all painfully interesting enough to get you hooked, yet uninformative enough that you keep moving to the next one.

Learning about Business

This site is the virtual Wikipedia of small business. Except, it’s not academic – not by a long-shot. Every concept is applied, and some of it has to be learned indirectly. I think that’s what makes it awesome.

First you’ll notice that small business valuations are silly. There are countless liquor and convenience stores up for sale at any one time for 2-3 times the cash flow to the owner. So, if a liquor store makes $500,000, you might notice that it can be purchased for $1.5 million or less. That’s an insane valuation – 33% per year is a spectacular return on capital.

And then you’ll notice all the crazy ways that people value businesses. For example, the standard in the gas station department tends to be a valuation based on inside and outside sales. Rarely are these two combined, since gas is unprofitable and inside sales are where the magic is made. But what is really cool is how these numbers change. One gas station might sell 20,000 gallons a month outside, then $70,000 in sales on the inside. Another might sell 40,000 gallons outside, then sell only $105,000 on the inside.

Obviously store one is doing much better when it comes to turning outside sales into higher-margin inside sales, but why? Could you rearrange the second gas station with 40,000 gallons in outside sales so as to improve conversions and profitability?

Maybe gas station 2 has more customers with trucks, which have bigger fuel tanks and thus buy more gas on each stop. Or maybe gas station 1 is close to an apartment complex, making it more of a convenience store and less of a gas station.

Dirty Talk – Car Style

You gotta’ check this one out: a lot of 12 car washes that seemingly runs “hands-free” thanks to skilled employees. The sales price? $10.5 million bucks on cash flows of $870,000 annually. Now, that’s a pretty high multiple – so there’s upside.

The listing notes that car detailing and washing businesses were hit during the recession (people can’t afford a bath for the Lexus anymore!) but economic improvement would allow for upside. Makes sense, right? It’s in line with my thesis for automotive production, which is largely based around the knowledge that American cars are the oldest ever. My car is 10 years old and there’s no way I’d take it to a car wash. Pfft, what do I care about resale when there is no chance I’ll ever resell it?

Higher income in car washing? Hmm, it’s as easy as discounting for fleet owners, so as to add to marginal incomes with each additional car wash. Fixed costs have to be the most expensive part of this game, anyway. Water and soap are incredibly cheap. Hmm, what about old people. I imagine few people go to wash their cars before work, especially since its self-service. Plus, who wakes up thinking, “hey, I’ll go wash my car at 6am?” Get those retirees in when other people are working and marginal revenues leads to big profits by maximizing the amount of sales possible during daylight hours.

Oh, and this opportunity even goes so far to appeal to value investors. Competition is apparently limited thanks to local zoning laws that make startup costs for a new car wash too high to encourage competitors. Investors should enjoy that.

Waste Your Day Away

Hey, so this site might be a complete waste of time for practical purposes. But it’s probably the easiest way ever to learn about a multitude of factors that affect business decisions. It’s also kind of fun to look up businesses and see how fat their margins are, just so you know how bad you’re getting ripped off when you visit a similar business in your local area.

It also shows why the Millionaire Next Door is likely to be a small business owner. People who work for a living don’t sell their jobs for 2-3x annual income when they retire. Small business owners do.

Anyway, I just find this site absolutely fascinating. Sure beats the hell out of chemistry homework. Just don’t go to it if you have no surplus time to waste.

Photo by: MWichary

{ 8 comments… read them below or add one }

Darwin's Money April 18, 2012 at 20:23

Pretty cool; thanks for passing that along. Depending on how “hands-off” the businesses are, a rich investor looking to diversify could just buy a bunch of these businesses in diverse industries for the cash flows – pretty quickly!

Reply

JT McGee April 20, 2012 at 09:16

Yeah definitely. I’m amazed at how profitable some of these businesses are – the home furnishing businesses seem to absolutely kill it when it comes to return on capital. Heh, who would have thought the mark-up would be so big in furniture. 😉

Reply

Financial Uproar April 18, 2012 at 20:36

This is kind of on topic, so I’ll tell the story.

One of the gas stations I deliver chips to seemingly increased their chip sales 25-50% overnight. They were absolutely rocking everything else too – the Pepsi guy confirmed their soda sales increased too.

What was their secret? They turned off pay at the pumps. It annoyed the odd customer, but 99% just shrugged, filled up and then came inside to pay. While inside, they obviously bought stuff.

It just shows how little changes can have a big impact on this businesses.

Reply

JT McGee April 20, 2012 at 09:15

That makes perfect sense. Question: are there any pay at the pump stations in the area surrounding this one? 20-50% is way more than I would have suspected, given that I’m usually a just gas or gas + fountain drink kind of shopper.

Reply

Jeff Reed April 19, 2012 at 09:12

Thanks for a new addiction JT. 🙂
At least now I will learn something useful while wasting time.

Reply

JT McGee April 20, 2012 at 09:14

Hey, it’s a fun one! I’m just glad there’s no counter on the site keeping track of how much time I’ve spent browsing through the listings. 😀

Reply

American Debt Project April 20, 2012 at 12:02

Yeah!! I hadn’t seen that site, but I’m a regular visitor to bizben.com and bizbizbiz.com, which are more California based. I have a few different business types I like to research semi-seriously, and then others that I just daydream on (the impractical and low volume juice shop). But here’s where I get tripped up in actually making a move on these businesses…when the sales volume is below 100K annual, I feel that owners might be doing a lot of fudging the numbers. There was one business that I was very interested in with an annual revenue of $70K, and the owner’s rep told me, “Most businesses will not have tax returns under 100K gross”. WHAT?? So did that guy just tell me that this business doesn’t file taxes? Really? I look more in the range of 100K to 250K now, even though I think if I find something smaller with good potential and few competitors in the neighborhood, I would prefer it.

Reply

JT McGee April 24, 2012 at 10:13

Yeah, I think there’s a lot of potential accounting concerns with the smaller, cash-only businesses. I would have to take a second look at any of them for that reason. Right now, it may not be as ridiculous as it sounds, since capital expenditures and expenses are virtually the same thing for small businesses with less than $250,000 in CapEx. Tax law allows immediate depreciation in year 1 for all capital expenditures of under $250,000.

Speaking of impractical juice shop…after seeing the cash flowing through a shaved ice stand I seriously thought I found my life retirement goal. Throw me a goofy hat and a shed and I’ll slap my retirement business on the beach to sell shaved ice while I work on my tan in the downtime. Sounds like quite the lifestyle. 😉

I think there’s a lot of potential for businesses that have some kind of economic protection in the supply-chain. Furniture businesses, for example, will probably always be around as you wouldn’t buy a couch without first sitting in it. Simple retail isn’t the same. Yet, convenience stores will always exist because…well, convenience is the real product in most businesses. Heh – I can’t see where people ever stop paying a premium for convenience. Some of the other businesses (like nick-knack garbage) are about as disinteresting as watching paint dry.

Reply

Leave a Comment

*

Previous post:

Next post: