Typically you look for a business owner with a stable and high-quality small company who wants to move on or retire. It's common to buy it from them using debt financing with a 10-20% down payment and take over the day-to-day operations of the company, but many different kinds of structures can be used.

When you start a business from scratch, you have to figure out everything at once: what products to offer, how to market to customers, how to produce your products, what to price your offerings at, and much more. You are making a bet that customers will be willing to pay what you'd need to charge, and it takes a while to ramp up. When you buy a business, you can find one that has a proven business model and has already put all of this in place.

When you buy a small business, you need to bring some capital and probably take on debt, such as an SBA loan, to afford the purchase price. You need to make sure that the business is capable of running profitably for years to come, and that you will be able to fill the shoes of the former owner. There is risk!

When you buy a share of stock, you can expect a 7-10% average return over time. When you buy a small business, you normally buy at a price of 2-5 times the annual cashflow, which equates to a 20-50% unlevered return. It is one of the highest-yielding assets that one can purchase, but only for those who can accumulate the skillset, capital, and risk tolerance to pursue it.

Buying a small business normally involves debt with a personal guarantee. That means if you borrow money and the business fails before you pay it back, the bank will potentially come for anything you own. You have full skin in the game, not just the amount of money you use for a down payment. And it's up to you to find the business, coordinate the deal, and run the company. Buying a business without an endurably profitable business model can have huge consequences.

Buying a small business is not for everyone, but for those who are a good fit it can be the most lucrative career and investment path available. Contrary to popular belief, it is not necessary to be a millionaire or an established business executive to buy a small company, but this path should never be pursued without an extreme level of caution and preparation.

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