The Lifestyle Play
How to pick a small business that could grow into your own little empire.
(Business 2.0) – There are few better ways to live a rich life than to work for yourself. But remember, that doesn"t always mean starting a business from scratch. Buying one that"s already up and running is often a smarter route.
David Choi, assistant director of Loyola Marymount University"s Hilton Center for Entrepreneurship, says that, surprisingly, bargains abound. He recommends focusing on businesses that are sitting in the sweet spot of a trend and yet sell for relatively low multiples of their annual cash flow. Here are five sectors that top Choi"s list of hot prospects: They boast attractive price-to-cash-flow ratios, offer solid growth potential, and allow would-be entrepreneurs to get in for less than $1 million.
DAY SPAS»With Americans working longer and harder each day, demand for spa treatments is booming. As a rule, these businesses have healthy cash flows: Most lease their storefronts, lowering the initial investment, and rent out stations to manicurists or masseuses, which guarantees steady revenue. Yet because they"re easy to duplicate, they also tend to sell at a low multiple of two times cash flow. Choi says the key is to find a spa whose services are tailored to the neighborhood: An outlet in a financial district will see higher demand for chair massages, for instance. "You need the right approach," he says. "If you can"t figure out why anyone would pay $40 for a haircut, this isn"t for you."
PET PRODUCTS»Nearly every perk we allow ourselves these days—manicures, organic food, designer jewelry—we"re also lavishing on our furry friends: Americans spend about $34 billion a year on their pets. One booming area is designer pet treats, though getting in is rather expensive, with these businesses selling for about five times cash flow. A less capital-intensive play is grooming salons—essentially day spas for pets—which, like the human variety, can be had for about two times cash flow. "These pet operations are popping up everywhere," Choi says. "Some are at the infant stage, but they"re very promising."
LEARNING CENTERS»Buying into the after-school tutoring business is a little expensive—you should expect to pay as much as three times cash flow. But, Choi says, a number of trends make this sector worth the investment. First, the $23.7 billion No Child Left Behind initiative has created a source of funding for centers in poor neighborhoods. Second, standardized tests are more important than ever in college admissions. Finally, parents who can"t afford private schools often do pay for tutoring. Tapping into each of these requires a different approach. But once you have a system in place, Choi says, it"s relatively easy to expand by adding locations.
CHRISTIAN BOOKSTORES»Independent booksellers are struggling in the era of Barnes & Noble and Amazon.com. But an exception is the Christian market. Many stores are also having luck selling Christian music—another high-growth niche in an otherwise stagnant market. Religious book sales have risen 35 percent in the past four years to $3.5 billion, a trend partly responsible for driving the multiple asked for these stores to about 3.5 times cash flow. But such growth often leads to a period of industry consolidation, Choi says, which can provide a lucrative exit strategy.
FUNERAL HOMES»Not exactly a glamour business, but Choi considers this a prime investment opportunity for two reasons. First, it"s a still-under-the-radar way to play the much-discussed aging of the baby boomer demographic. Second, there"s a speculative element: Consolidation in the industry has been strong enough that you can likely buy an independent home for about three times cash flow, upgrade the operation to improve profitability, and then sell to a large national chain. It"s a classic fixer-upper, small-business style. — KEVIN KELLEHER