Ever thought of buying a little taco shop and slangin’ tacos for a living, or maybe as a side hustle? I’m about to break down what you might make if you do.
Intro
A few of the local businesses that you frequent are probably for sale. And maybe you’re tired of wearing khakis to work. And maybe that’s what brought you here.
Or maybe, you’re wanting to diversify your investments, and learn what else is out there besides the bond market, the stock market (yawn), and real estate investments (which are great, and part of a balanced portfolio, but don’t offer nearly the returns as small business).
Your neighborhood taco shop probably makes the owner about $100k per year.
You might be thinking: isn’t me saying that a bit like estimating your hair length based on your email address? Well, no. Unless your email address begins with mermaid69@... or ends with @hotmail.com.
I’ve looked at (literally) thousands of businesses for sale over the years, and performed financial valuations on hundreds... so I can generally walk into a business and make a reasonable guess at its revenue and what the net income should be.
Maybe your local taco shop is booming, or maybe it’s sleepy… but I’m gonna assume it’s sorta in the middle and netting about $100k per year. That means this little taco shop would probably sell for about $200k. (Businesses like this might be listed for as much as $300k, but I paid about $150k for each of the last two that I purchased. But again, let’s assume the business would sell for $200k.)
1. Cash Purchase & Owner Operated
So you pay $200k for your local taco business and you take home $100k. (There a LOT more that determines your takehome when it comes to small business, so check out my BUSINESS VALUATION breakdown if you haven’t already.)
With $100k profit, your annual return is 50%. Sounds pretty sweet, and you get to work in a taco shop where the only khaki’s you’ll see have colored bandanas hanging out of the pockets. Or maybe you’re selling tacos to hipsters, I dunno.
2. Cash Purchase & Absentee Run
Let’s say you wanna keep your day job, or keep writing your magnum opus… so you hire a manager instead of running it yourself. You’ll probably still end up putting in 5-10 hours a week, but no biggie. Maybe you pay your manager $50k per year. $50k isn’t a lot in some areas, but managing a taco shop isn’t rocket science and you’ll still probably handle some of the back-end managerial duties. Still, in some places you’ll wanna pay more to A) pay a fair market rate, and B) make sure they don’t steal all your profits or act like assholes at work.
So after paying $50k to a manager, you have $50k of net income left, and a side hustle that earns you a 25% annual return.
3. Financed & Owner Operated
Why throw cash on the table if you can leverage (especially with today’s interest rates)? Someone selling a business will often be open to carrying 50% or more of the sales price. But the SBA’s 7(a) loan program is great, and will loan up to 80% of the purchase price. Unlike a traditional bank loan, you don’t need much in the way of personal assets to qualify because the loan is secured by the assets of the business that you’re purchasing. You just the 20% down payment, a little working capital, and a credit report that’s not totally fucked.
So for a $200k business, you put down $40k to net $100k per year… but you’ve also gotta make payments on your SBA loan. Let’s assume it’s a 10-year loan and you’re paying 8%. That’s about $1941 per month, or $23,292 per year. So in this scenario your take-home is actually $76,708. That’s a 192% return and a relatively low stress job.
(Additional benefit of financing through the SBA is that the seller gets to cash out 100%, which generally allows you to negotiate a lower purchase price.)
4. Financed & Absentee Run
Okay, back to the scenario where you pay a manager $50k per year. Subtract that from the $76,708 and you’re left with $26,708. That sounds tiny, but you only put $40k in, you don’t have to work there, and you’re earning an annual return of 67% on your cash invested.
Regardless of the high return, the small amount of cash definitely wouldn’t be worth it. But apply this same approach to slightly larger businesses, or begin to build a portfolio of small businesses using this approach, and it starts to become attractive.
5. Starting from Scratch
Starting a Main Street business can often require more cash than financing a business purchase.
For the above taco shop, you’d have to find a space to lease, invest in tenant-improvements (easily $20k but probably more like $70k if the space you’re leasing wasn’t already outfitted and permitted as a restaurant), buy equipment (which would run about $40k new but you could easily pick up used for $10k… especially in today’s market). So you could easily spend $70k, and then open your doors and slowly build the business organically.
The taco shop used in the above example, with $100k net income, probably has about $400k in gross revenue. That might be a reasonable target for year 2, but unless you have a bunch of hipster friends, a large IG following, or happen to secure a super sweet location, I’d expect you to gross more like $250k in year 1. And because some of your expenses are fixed not variable, while $400k might give you $100k in take-home, $250k in revenue probably looks more like $40k take-home.
So starting a taco shop (or a number of other Main Street businesses) from scratch can often cost more and make for a tougher first year or two than financing an existing business.
That said, having purchased 2 small food businesses, and started a 3rd from scratch, there’s no question that I’d choose to start from scratch. If you have a good eye, and know how to make some smart decisions, it’ll make a big difference. One of the food businesses I purchased grossed about $500k per year (and revenue growth was pretty flat). One that I started, that was basically the same size, ended up grossing $2MM per year after a few years. The first year was lean AF, and I wouldn’t have been able to properly set up the business had I not already owned a similar business… so if you’re trying to slang tacos for the first time I’d recommend buying an existing business, or starting from scratch with the help of an advisor and a bunch of IG followers with the munchies.
Btw – I’ve never owned a taco shop. My food businesses were organic quickservice cafes. I’ll detail how to start one of those, explain food costs, ideal menu mix, and other important considerations in a subsequent post.
Finding business listings
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