Why Young Aussies Are Buying "Boring" Businesses Instead of Property

Jason · 00:00Welcome to episode 260 of the Numbers Game. I'm Jace. I'm here with Nick and Marty, and I say things that I regret sometimes. How are you, Nick?

Nick · 00:08Going well, Jace, you?

Jason · 00:10Yeah, I'm good mate. How's the puns? Got a pinched nerve in my back, so yeah, really

Nick · 00:14talk us through that.

Jason · 00:15No, I don't really want to.

Nick · 00:17Deadly or, um,

Jason · 00:18no.

Jason · 00:19No. Um,

Nick · 00:19uh, Olympic, uh, what's the ones where you throw it above your head? Um,

Jason · 00:24uh, the snatch and clean.

Nick · 00:25Yeah. Li snatch and clean. Surely.

Jason · 00:27I wish it was of yours. I wish it was something that cool. One of yours, man of yours. Stature. I have a new coach and it's all driven through an app and it popped up saying Booty Builder, and I had to watch a video and then I was at the gym and I saw the machine and thought that should be pretty simple enough to use.

Jason · 00:40And

Marty · 00:41why are you building up your booty? What's, I

Jason · 00:44got a pancake butt, mate. I, I want to like, you know, I just trying to get stronger for running. Um, but it's not working too well. It's far out. I'm, I'm getting closer and closer to retirement at this point. Greg's gone and done his sub three hour marathon and I'm getting slower by the, by the day.

Jason · 00:59So, uh, well. We'll see what happens. Slower and grayer. If you're on the YouTube channel, you can see that. But anyway, let's, let's focus Nick, what is happening?

Nick · 01:07Yeah. Uh, well, Jason, I'm bringing you, uh, an alternative to property to get wealthy. Ooh. Um, I like that Marty. It

Marty · 01:19core or is

Nick · 01:19this in

Marty · 01:20Australia? Where, where are you going?

Nick · 01:22What are we talking Australia. We're talking Australia. Good.

Marty · 01:25Good, good.

Nick · 01:25Um, and the headline or the article I read suggested why young Australians are buying boring businesses instead of property. Mm-hmm. And it made me think of you, Marty, because I'm pretty sure you bought this up at, um. At some time, um, in the, uh, in the, in the past around, um, I think I, from memory we were talking about baby boomers and, um, their inability, uh, to either sell property or lack of succession plans.

Nick · 01:53Um, but it seems to be a bit of a trend at the moment. And here's some stats for you, obviously, small business. Um, you know, our country relies on small business and Jace might have some more stats around that. Mm-hmm. But 30. 9% of small business owners expect in inverted commas, their kids to take over their businesses.

Nick · 02:14Now expect in inverted commas because I think in a lot of those cases, the kids are probably not so, um, and not so keen to do it from, from what we've seen. Um, nearly 50% expect closure. Or an outside sale at retirement. So only kind of 50% of these people are thinking about actually selling their business, uh, when it comes to retirement.

Nick · 02:38Um. So I guess what it suggests to me is there's a lot of really good businesses out there and call them boring businesses, is what the article was referring to. So what I mean by boring is good turnover, not doing anything sexy. Good, uh, good profitability. A boring business that people don't, um, are probably not thinking about buying or not thinking about.

Nick · 03:05That's something that they should be doing. Or vendors, or, sorry, business owners are not thinking about selling their business, but. I think what's happening at the moment with, um, a, well technology, ai, um, auto automation, all these cool things that you can do in business and the cool things that young, and I'm gonna, I'm not discriminating here, but young people are across, um.

Nick · 03:30I honestly feel there is a lot of opportunity to go into these businesses that might be, you know, 20-year-old, 30-year-old, small family businesses and bring in significant, um, increases in efficiencies or productivity, which, you know, then generally results in, uh, net profit to these businesses that might be a bit stale now, not stale in the service they provide or the product they provide, but maybe stale in the way that they operate.

Nick · 03:59Um, this particular article was talking about a couple, um, Ashley and Joe were their names Okay. To, um, to talk about this because it was, uh, it was on a, uh, it was in the A FR. Um, they bought a business called KNF Fabrications, um, which was a Sunshine Coast Steel Fabrication business. Uh, it had been running for 29 years.

Nick · 04:22Had a two to $3 million a year turnover. So obviously it's probably somewhere in the middle there, two and a half. Now let's assume this business is running at a 20% net profit, give or take. Most small businesses like that probably do. So there's half a million bucks there in income left for, um, for Ashley and Joe in its current.

Nick · 04:43State. So, um, both of them I believe, came from an ENG engineering background. So clever people, uh, probably came into that business, looked at it and said, well, geez, we can make that better. We can make that better and we can make that better. In the end, probably resulting in a better bottom line. And you look at what the, the alternative is.

Nick · 05:04So the alternative is that these two individuals or this couple go and get a job, um, hopefully earn $250,000 a year each. Uh, which in most cases people don't have the ability to do that. Um, or they can buy small business like this. Have a real impact on the way that the business runs, and then also have the ability to improve that business and in most cases, improve the value of it and create an asset for yourself that when it comes time for you to move on, you've got a business that you can on sell.

Nick · 05:39Um. So then it got me thinking about some stories that I know personally of people who actually do this for a living. As in, they don't necessarily go in and work in these businesses, but they just simply buy small businesses. Um, they can, um, they can use their skillsets. They're just general bu business skill sets.

Nick · 06:01They've got to go and improve these businesses, put the right people in place, and then go and do it all again. So. It got me thinking that there's a real opportunity out there, whether you wanna buy one or two businesses that are similar, um, businesses that are, um, separate, um, from an industry point of view, or you just would rather go and work for yourself.

Nick · 06:21Um, there might be a lot of opportunity out there because. The baby boomer population, um, is coming into retirement. Um, and I would assume that there's a big number of those people that are running small, successful businesses that have set them up, um, that are just ready for, um, innovation and for young people to come and take over.

Nick · 06:44Marty could see you nodding.

Marty · 06:46Oh, I'm, I'm very pro this at the moment. Just, I feel like you've, you've hit the mark. It's, um. Such an opportunity. 'cause a lot of those experienced, boring businesses have deep, deep relationships with their client base. So you've got a lot of loyalty within those businesses.

Marty · 07:04And like you're saying, if you've got younger people coming in with, uh. AI tech, marketing optimization, logistics optimization. You know, the first thing you could do is strip out expense. You know, so all of a sudden you're increasing your asset exponentially just by not even having to do more sales.

Marty · 07:25Right.

Nick · 07:26And it's a really good point. And I think what you would find is there would be so much low hanging fruit, because I'm just picking an age here, but did, let's say you were running that business and you were 60 years old and you have five years left, uh, before retirement. In 99% of cases, you are not reinvesting into that business to make it bigger and better.

Nick · 07:48If you've only got a few years left,

Marty · 07:50correct,

Nick · 07:50the business has probably done what it needed to for you from a, from a wealth creation point of view, why would you take a risk? You probably don't have the energy, you probably don't have the know-how. So when you go into these businesses, I would predict there'd be a lot of low hanging fruit where you can make significant, um, significant, um, improvements pretty quickly.

Marty · 08:12Well, where, where can you get the, like when you think about it done well as a young person coming through, like if you are. Going to uni, got a hex debt, getting a job, trying to save up to buy property. You know, it's, it's a very much an incremental trend. Upwards, right? And more so difficult now than ever before to get into the market.

Marty · 08:34But if your first pursuit is going into a business, all of a sudden amplifying your income 'cause it already exists, um, all of a sudden having an asset. That you, you know, you didn't have that you can strip expense and actually make it actually more valuable. Your opportunities even into property off the back of that decision could be very, very strong in the next year or two if it, if it does well,

Nick · 09:00yeah, I, and I think you, what we need to also address and um, this is what the article did talk about, is that small business is not for everyone.

Nick · 09:10I think a lot of people go into small business. And make a few assumptions I can. I can dictate my week. Uh, I can probably work less. I can play golf every Friday, uh, and every Wednesday. Uh, 'cause I'm a self-employed person. Now what I can tell you, and I'm what both of you would back me up and most small business owners would back me up, um, is that small businesses bloody hard.

Nick · 09:34And there's times where you're, you've really gotta grind. And if you're lucky enough to get it set up, um, to a point where you know, you can maybe only work four days a week, that's great. But if you wanna be successful, that generally doesn't happen till later, um, in the business life cycle. So that, you know, you have to be on board with the fact that you're going into something that's gonna require a lot of work and the buck stops with you versus a salaried role.

Nick · 09:57Um, but from a wealth creation point of view, Jay, she might be able to help me out here. Um. What kind of multiple, if you're just looking at, you know, like a small manufacturing or even a trade business that, that is sellable, what kind of multiple of profitability you looking at generally from a valuation point of view?

Jason · 10:18Yeah, I mean, depends obviously industry specific, risk specific, but you know, let's say we're looking at a manufacturing, uh, client, uh, at the moment and they're looking at, at a five times multiple of profit. Um, they've got a million dollars profit. They've been offered close to 5 million. All kind of, you know, you know, shapes up nicely.

Jason · 10:37Um, depends. So the multiple often comes from it's industry specific, but also then boils down to the risk factor of the business too. Like, do they have repeat clients? Is it something, you know, are their systems and processes really good? Does the business operate without the business owner being there?

Jason · 10:52Um, or you know, what are the risk factors? Um. You know, accounting and bookkeeping professions, usually dollar for dollar of revenue, um, or sometimes can be three, three to four of profit, um, ebitda, um, you know, I think, you know, your, your profession around financial planning books and, and mortgage broking has a set multiple, uh, for the value of the book.

Jason · 11:12So there's all, all the, all different ways, but I mean. The, the sheer amount of businesses for sale at the moment. I mean, it's such an interesting time to kind of look into it that may, may be running, I think as well, if you are already a business owner and you're looking to expand and grow, there is great opportunities to tuck in a portfolio of business or to acquire another business if you've already got key resources, key people, systems and processes.

Jason · 11:36I know, uh, in the accounting space, heaps of acquisitions going on at the moment. Um, and then more broadly, just small business owners in general. I think it's the numbers. Around 60% of business owners over 55 don't have a succession plan. So, you know, there's, there's all these businesses that have been around for a long time that have built a great, great business.

Jason · 11:57All different industries. I mean, yeah, like I just did a little, little search on the business for sale at the moment and we go, oh wow, look at that one. Look at that. Like just, you know, mind blowing. And you don't wanna see these business owners that have built something their whole lives, walk away with nothing.

Jason · 12:12But at the same time, if they haven't had a succession plan, you are often going to be able to get a business for cheaper. Than maybe what it could have sold for. Um, if you go in and negotiate the right price, you can do a good handover with the business owner. Um, you know, we've seen some great success in, in business sales where.

Jason · 12:31You know, and this example, as you said, you know, someone, not necessarily younger, but somebody comes in with a fresh set of eyes and some energy and a different skillset that maybe the existing business owner didn't have. I mean, one of the, the clear examples over the last 10 years has been a business that didn't have a good online presence.

Jason · 12:46They were a great operator. They built a good business locally, but all of a sudden somebody came in with a bit of a digital background and had a website, SEO, lead gen. All of a sudden, hang on a minute, geez. We've got leads coming in. We've got systems and processes, clients are being serviced or products are going out the door.

Jason · 13:04Um, you look at e-commerce these days, um, e-commerce businesses getting snapped up, um, with, with great multiples and great sales prices. There's bigger, bigger businesses upstream that want to bring on products onto their. Book, you know, you think Adore Beauty and you know, the, the multivitamins and all, all these kind of businesses.

Jason · 13:21So it, it's, it's an epic area to look into and, and one that yeah. Is very exciting, uh, for, you know, and I'm glad you brought it up

Nick · 13:29and let's, let's, let's go back to this wealth creation and just, let's just demonstrate how easy this could be. Um, so the first thing I'll say is you, is you need to make sure that if you're buying a business, you need to understand, which, you know, I'm sure most people would, the industry.

Nick · 13:44What are the risks associated? Obviously AI and tech, uh, is a big thing at the moment, so you've gotta make sure that, you know, it's something, uh, as in AI and tech is something that can enhance the business. That's not gonna make it obsolete in a short period of time. And that's where, just to digress a little bit, that's where I think a lot of businesses and industries, including ours, yours and mine, Jace, have got a, a window of three to four years to really increase our productivity and, um.

Nick · 14:12In the end, our profitability before, you know, we might see some significant changes, um, that may or may not be in our favor, but I think we've got three or four years to, to really have healthier businesses based on some of the tools that are available now. So let's just throw some numbers around here.

Nick · 14:28Jason, you tell me this is that this is, um, outside of, you know, what's, what's achievable, but let's use this particular business, uh, this $2.5 million business. Um, let's assume in 20% net profit, it was probably playing the business owner. A small salary would've been under market, I would've assumed. And it had a 20%, um, net profit.

Nick · 14:52Let's assume it was a business that had a lot of key person risk, so it was pretty reliant on maybe the original founder. It was turning over 2.5 million. It obviously had staff, but let's say it was fairly reliant on the individual that started the business. Let's just say it was pretty one dimensional from a revenue point of view.

Nick · 15:13Um, and to your point, before it was a business that wasn't, um, yeah, the books were there, but it just wasn't the type of business that was packaged up. Um, in a way that made it very attractive, which most of these businesses aren't because these business people, um, organically fall into business from being good at a particular skillset.

Nick · 15:34So they're generally not, they run great businesses, but they don't come in with a business acumen and business mind. Mm-hmm. So my. What I'm getting at here is this would probably not attract that five multiple, you were talking about this in its current state, might track a three to four.

Jason · 15:48Yep.

Nick · 15:49Let's say a four to be generous.

Nick · 15:51Let's say a three. Just to make the numbers more. Well, actually, what, what do you think it would be?

Jason · 15:55Three. A three? Yep. Depending, look, depending, yeah. If there wasn't recurring contracts and you know, they had to go out and find new work all the time, and as you said, the, the, the previous business owner was a key person in those relationships, then yeah.

Jason · 16:08Threes, let's go with three.

Nick · 16:10So let's say it's a half a million dollar net profit. Three times that it's worth 1.5 million, which is probably close to what these people paid for it, if not less. 'cause I think they were talking in the hundreds of thousands.

Jason · 16:22Wow.

Nick · 16:23Now, let's say you go in there with a business mindset.

Nick · 16:26You do a couple of things. Number one, you get rid of key person risk, and that means you extract yourself from being required to be in that business for it to operate. So you go find a good manager, you find some good salespeople, and you find a way to tie them in, which means anyone can buy that business and it will continue to run.

Nick · 16:45That increases the value. Um, let's say you increase the sales, so you go in there, you know, to your point before you find some, some new clientele because you do some different kind of marketing. Um, you bring in another product, um, that's par, you know, that's kind of in line with what you're already doing.

Nick · 17:01That can be maybe an upsell, hypothetically. Um, let's say you tie some clients into contracts, depending on the business. So you've got some recurring revenue or some, some security around the income that's coming in. Um. You find some productivity obviously through things like, you know, whether it's new machinery or it's, you know, AI or whatnot.

Nick · 17:23Um, and over a three year period, you take this business from a $2.5 million turnover to a $3.5 million turnover. That's not crazy. That's only an extra 330 grand a year. Um, and you get the net profit to 30%, also not crazy. So you've gone from a $500,000 net profit. To a million dollar net profit. Now, let's say that business is now highly attractive because anyone can come and buy that business.

Nick · 17:51They don't even need to work in it because the current owners haven't been working in it. So now it's a five multiple, which is what you think the, uh, a good business would sell for. So you've now got a $5 million business that you paid $1.5 million for over three years. Now that might sound like a big number, but that is.

Nick · 18:10I would think is achievable. You telling me that business is getting five times? All of those things that that business is doing are very achievable. Mm-hmm. Get rid of key person risk, get some, um, secure revenue in there, get your productivity levels up. So if you look at that versus buying a property with a lot of debt attached, um, working a job paying tax.

Nick · 18:31Also, we know the tax advantages with being self-employed, you can distribute your income. So, um, and, and reduce your tax as well, so. To me that's, I wouldn't say this has opened my eyes up, but actually sitting down and doing the numbers, it definitely, it probably has opened my eyes up to why, if I was a young person.

Nick · 18:50Smart, such as an engineer, someone good, um, with their hands that could, that was, you know, sick of working hard for 200 grand a year and losing a big chunk of that to the a TOI would definitely be considering going and doing something like this. And, um, Marty you, you, you mentioned it, and we have talked about this prior, but.

Nick · 19:11Maybe you just go knock on doors. Maybe you go and talk to people who you think are close to retirement and say, look, I'd love to buy your business. Can I come and work in it for 12 months to make the transition easy? And let's get you a good exit and let's get me a good entry into this industry or this business.

Nick · 19:26Um, and if you're really good at this, you can, you can rinse and repeat. So you might not sell the business. You might just go in there and make it way better. Extract yourself from needing to be in it. Then go and do it again and build yourself a portfolio of businesses, which some people do.

Jason · 19:42I think, yeah, I think the other one to, to think about here is begin with the end in mind.

Jason · 19:46And when, and, and I say that from a tax perspective, um, we've talked about it on an episode before, but there's this beautiful thing called the small business, CGT Concession. So if you buy a small business, you build it up for a couple of years and you sell that small business and make a profit. Not only do you when you, when you.

Jason · 20:03Make your capital gain on selling the business. You make a million dollars profit, let's say, but the tax on that can be half down to 500,000 and potentially half down to only 250,000. So you can imagine paying tax on only 250,000 for the million dollars profit you made to build that business up and sell it.

Jason · 20:22Um, then you get to roll that into another one potentially. So there's all these different, and, and maybe you don't pay any tax at all because you do the rollover. Um, small business rollover. And you reinvest that into the next business. Obviously that's just kicking the tax can down the road. But there are all these beautiful, wonderful exemptions out there.

Jason · 20:38And I know we might have, uh, shit canned, uh, Australia in the last episode with, uh, talking about what Singapore do well. But there are these nice things about the Australian tax law with CGT concessions around small business.

Marty · 20:49Yeah.

Jason · 20:49So lots to look into. That is the small business. CGT concessions. If you are already owning a business and thinking about selling it, if you're looking at buying a business, um.

Jason · 20:58You know, these are some things to consider because as you said, it's not just buying a property where you can make some money and get a CGT discount, um, you know, or, or grow your wealth, as Nick has touched on, it might be a great way to look at a different opportunity to grow your wealth, and that could be becoming a business owner.

Nick · 21:14Yep.

Jason · 21:14So Dick, you've got me super excited. Uh, you know, I think the, the, the prospects are ideas of, of buying a business, you know. Yeah, really got me going. But what, what are the practical next steps? I'm assuming not everyone can just go out and get a business. There's probably a few things you have to go through to, to satisfy that.

Nick · 21:31Yeah, so look, there's, you know, there's, there's a lot of things to consider. I think the first thing that you would do, um, is. Obviously have a look at what's around. There's, there's, there's a lot of business, um, broker, uh, business brokers out there, a lot of websites mm-hmm. Uh, that you can check, check out, um, where businesses are listed for sale.

Nick · 21:51So firstly, have a look around, um, have a think about what you could do, where you could add value, like where your skillset is. That's the first thing, if this is going to be for you. Um, second thing I would do is I'd probably go and speak to my accountant. Um, and if you didn't have a good relationship with your accountant.

Nick · 22:09Find a new one because you need someone, um, alongside you when you're deciding what, what you're gonna buy. So, you know, when you are buying a business, obviously you're gonna need to analyze financials, so you need to know what to ask for. Um, and you know, there's, it's not just the obvious things like how much money are you making?

Nick · 22:29There's, you can, you can make financials look, um, look any way you would like them to. So I think what you gotta remember is the, the vendor and the business broker is trying to make this business look really good. So you need someone on your side, like your accountant, who can you, uh, for lack of a better word, call bullshit if that is what's happening.

Nick · 22:50Um, and just, you know, just your accountant will give you certain things to look out for. Your accountant's probably got some war stories of people that are, have made mistakes. You also need to understand, we talk about this all the time, tax obligations. So, okay, if the business is making that much, how much goes to the A TO?

Nick · 23:06How much can I put in my pocket? Because you need to make sure that that business is gonna provide you the income that you need or the income that you may have been receiving, um, as A-P-A-Y-G, um, salaried employee. Um, other than that. You probably need to think about the funding. How do you fund this thing?

Nick · 23:23Um, there is, there is options out there, uh, for businesses to, um, to lend from banks. Banks can be quite funny if you're going into a business and it's your first time in or it's not an industry that you're used, that you are, um, skilled in. So. There can be some difficulties around funding, um, which is when you might, you know, you might talk about succession plans and, you know, going in and approaching business owners for, for long-term payouts or something.

Nick · 23:49So firstly, have a look around, see what's there. Um, speak to your accountant, um, understand how the funding could work so you can speak to a finance broker or your bank. Um, we'd be more than happy to help. And then second to that, I, it's probably. Well, lastly, sorry, is probably a deep dive into the industry and really pull apart.

Nick · 24:10What could go wrong is what I would suggest people do with that, with that product or with that service. Um, business, as I said, is going through significant changes at the moment because of, um, the increasing, um, impact of, of ai. It's not a buzzword anymore. It's here and we're still at the start of, um, start of the journey.

Nick · 24:30So make sure that you, you're well across. Um, the industry and make sure it's a long-term. It can be a long-term thing for you.

Jason · 24:38For sure and look, you know, just throwing under that AI or chat, GPT is actually a great place to unpack an industry and, and do some research. Back in the day, I would've said go and pay for an IBUs world industry report.

Jason · 24:49But before you go down that path, you can look at some businesses for sale, do some research. As Nick said, have conversations with the appropriate people. The numbers, game history of of episodes does have an episode on business funding and you know how to go about. Structuring businesses. So there's a few things in the, uh, 260 EP catalog that might help you along the way.

Jason · 25:08And you know, just looking at the moment, there's up to 20,000 businesses for sale in Australia right now. So there is a huge opportunity to look at an alternative way to grow your wealth. Um, so we appreciate you listening. Thank you for tuning in, Nico.

Nick · 25:21Build good businesses. Build big wealth game over

Jason · 25:26this podcast is for educational and informational purposes only.

Jason · 25:30The conversations are of a general nature and do not qualify as financial or tax advice. We recommend before you make any financial decisions, you consult a licensed professional. Individuals on the podcast may hold positions in the companies discussed. ---