I wrote earlier about how I invest, mentioning:

- cashflow producing loans
- majority ownership in cash flow producing assets
- minority stakes in startups

Got a lot of questions on #2, so let me expand

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EA`Za1. What do I mean by this? Basically, I buy stakes in companies and assets, like real estate, that are boring and cheap and which produce cash. I hope to grow these businesses but the main benefit is getting cash flow cheaply

note: I'm not a real estate pro
a few angles:

2. you can buy something and become the day-to-day owner/ manager

this strategy is good if you have no job or flexibility, or if the business doesn't demand much time-- e.g. e-commerce

for larger businesses this is a lot of time and effort

3. or you can buy a large stake from a founder, or a family member, where the company's management in place already

it's usually only when the business makes $100k or more, otherwise the business is usually too subscale to have a manager in place (or someone steps up)

4. where you have a manager in place, it can be a pretty passive investment-- you check in and see how things are going, but you don't need to be running it

if you can add value, then do that

typically you give the manager a stake to incentivize them. no worries

5. the third way is to buy a company, and make sure to hire a manager to look after your stake. you may want your own guy, or to fire the old ones, or to add skills

you need the business to generate lots of cash flow already, just to afford the price tag of the manager

6. the downside is that there's usually slippage in the short-term if you replace the founder and the management team, as you try to hold on to customers, etc.

but long-term this can be more lucrative, as if you bring a good manager then it can soar afterwards.

7. the hired gun manager strategy works very well if it's an industry where you know the right people and opportunities,

or if you have a friend who will perform well.

for real estate, you can either do the property management yourself or hire somebody.

8. lastly, you can buy a decent sized minority position, 20%+, which gives you certain rights and privileges, but is not full ownership.

this can give you some protection on your investment and be mostly passive

9. the key here is what are you buying?

you want stable, boring businesses with longevity. nothing fancy, no cyclicality, no flash

good:
- professional services
- basic services, e.g. dry cleaning, car repair
- icky customer bases, e.g. IT, insurance, medical, info products

10. these are businesses that will be around in ten years, and are relatively sticky

Furthermore, they don't experience brutal competition, so you can grow them, usually with little effort

once it's up and running and somewhat profitable, then it's tough to break easy to grow

11. the key to buying cheap is two components
- price
- terms

obviously you want the price to be as low as possible. 5x pre-tax cash flow should be the ceiling, except for IT companies where you can pay a bit more

5x pre-tax cash flow = 20% gross cash flow yield. that's cheap

12. if you can it cheaper, even better.

furthermore, if you can use leverage, then your returns on equity will improve

that way, if you are buying a business cheaply, then you can be paying down the debt and paying equity soon

13. re: terms, you want to

- lengthen payment periods as much as possible
- align your interests with the seller

ask for:
vendor's loans /deferred consideration;
profit-sharing
earnouts

paying later means paying out of cash flow; earnouts are a % of increased P&L

14. what to if you're <30?

- buy a simple business, like an e-commerce site from Fippa for cheap

- fix it if you can see obvious problems
- or take your spare time to grow it

- take the cash flow and go and keep buying/building

15. if you're 30, with experience and cash

- invest or buy into into a busy in a sector you understand, where either the founder is willing to stick around or where management is in place

- grow it somewhat and either sell or bank the cash

16. remember, cheap and boring = steady cash flow

this is a great way to build wealth, and one investment can transform your financial situation

what do you think about investing in businesses?