Tuesday, July 13, 2010

Why You Should Buy a Business Instead of Getting an MBA

I have already chronicled the diluted value of an MBA, here and here. I also mentioned that one option for those looking for a job is to get into sales (at least for a short period). With a sales background, you will always be in demand since businesses always need people to boost their revenues. And, with a sales background, it will be much easier for you to land a job in some other career path, since you will have the sales background to sell yourself.

Another option, instead of an MBA,  is to buy a business. Notice I didn't say start a business. It is much more difficult to start a business than most imagine. Unless you have family that are in business where you sopped up a lot of knowledge while you were growing up, you really have the odds against you, but if you buy a business the right way that is already in existence, things could be different.

Let me tell you about the morning I earned my MBA, many years ago.

At the time I was living in New York City and with a friend we headed out to Long Island on a Friday night. The night turned into a long one and we decided to stay over my friend's parent's house on Long Island and head back into the city the next day.

That morning I woke up before my friend did and I headed down to the kitchen. My friend's mother started to make me some breakfast when a neighbor walked in and sat down at the kitchen table I was at. He was an elderly gentleman with a cane.

He started telling me that he was looking at a parking garage that he might buy in the city. I remarked that I thought parking garages were a great investment because as inflation heated up the value of the property would climb and in the mean time you were getting paid to hold the land. He half acknowledged me and continued with his story/analysis.

He told me he could move the parking lines closer together at the garage and increase the number of cars parked by 12%. I thought, Wow, what a clever idea.

He then told me the garage had too many valets on and he could cut back by them by about 50%.

He then told me that there were too many trash receptacles and the trash was picked up daily. He said he could cut the receptacles in half and only have trash pick up every other day.

I thought to myself, again, Wow this man is going to cut costs by about 50% at this parking garage and increase revenues as soon as he buys the place. Boy, did light bulbs go off in my head. He knew what the garage was generating in revenues. He sure wasn't going to pay more than it was worth based on current revenues, but the worth would increase by 50% once he implemented his plans. Now, that's an entrepreneur. His risks were limited because of the history of the business, but his upside (to him) was obvious.

He left soon after giving me my MBA. My friend had woken up by this time and when the gentleman left I asked my friend, with sort of  "Who was that masked man" awe, who that was. It turns how he was one of the top real estate holders in NYC and held among many prize properties the Chrysler Building.

Ever since then I have always been on the look out for such opportunities and have noticed them when others implement them. There used to be a pizza parlor on the corner of 59th Street and Third Ave. The owner of the building who owned the pizza parlor sold the building.

The new owner immediately moved the tables together in the pizza parlor and put up two walls and rented out the space to two other merchants. I doubt he had any decline in pizza sales, and now he was collecting rent from two merchants who were paying him to be across the street from Bloomingdale's.

In Los Angeles there is a hotel downtown called the Figueroa Hotel. I am sure that when the current owner bought the place he probably paid less than a million dollars. It was pretty run down. He fixed it up a tiny bit and decided to give it a Middle East theme. This consisted of hanging colorful drapes (kinda Middle Eastern looking) throughout the hotel. In the big convention areas on the lower floors, instead of chairs and couches he threw Middle Eastern looking pillows. It worked for him and the hotel appears to have a fairly steady flow of customers. But, here is the real kicker. One wall of the building faces the major highway that brings traffic downtown. He put that side of the building up for rent as a huge billboard. Last I heard he was getting $500,000 a month for billboards at his hotel. Go that? That's $6 million per year of free cash flow for a building he probably paid less than a million for. Since then Staples Center (where the Lakers play) has moved next door and an entertainment complex. Who knows how much he is getting now?

The point of these stories is that you really shouldn't try to reinvent the wheel by starting a new business. You should, instead, buy a business where you can see immediate ways to significantly increase revenues and lower costs. By increasing revenues, I don't mean a great new marketing campaign you have in mind, I mean non-cost ways of increasing revenue, moving parking lines together, selling billboard space, or however you can generate additional revenue in your particular business.

If you have never bought a business before, find a sharp accountant and ask him to look at books of the business for you. And try to negotiate a purchase where payments are made over time to the owner, an owner isn't going to do that unless he is comfortable that the business is solid.

What I have described above is what LBO operators and Private Equity operators do on a grander scale. If you do it right, the rewards can be significant, but the key is to be patient and wait for the opportunity where there are very obvious ways to increase revenue and cut costs. For many, it's likely to be a much more solid path to success than an MBA.


  1. Thanks for this great post.

  2. A+ post. Solid advice here.

    Many people are unwilling to do their homework and take small, relatively simple steps like this. They want to get an MBA and hopefully get recruited for a comfy +$100k job out of school . . . even though they may have no eye for opportunities and few real-world skills.

    I get especially tired of the people who got rich by dumb luck, but obviously couldn't think entrepreneurially if their life depended on it.

  3. This deserves a re-post.

  4. This is a really terrific idea. Not only could the individuals avoid the high cost of an MBA, they could potentially generate a huge fortune. But even if they just made a nice living, it would still be a much better path.

    As a matter of fact, this idea occurred to me earlier this week and I have begun a search to purchase a business. I couldn't agree more that is much better (less risker) to buy rather than start from scratch.